Be Prepared

 | Dec 13, 2011 | 8:35 AM EST  | Comments
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"Life is 10% what happens to you and 90% how you react to it." --Charles R. Swindoll

European stocks were firmer overnight and that is all the U.S. markets need for a better open. The only thing that really matters these days is the direction of the euro, and it is up at present.

As I've been discussing lately, the big question for this market as 2011 winds down is whether we can forgot Europe long enough for some positive year-end action. Emotional and psychological conditions are good, with plenty of skepticism, poorly positioned market players and the need for relative performance by money managers, but the threat of Europe has been keeping parked on the sidelines.

Technically, the indices aren't in great shape but they are still holding where they need to. The S&P 500 gave back all of Friday's gains but it is still above the 50-day simple moving average. What will really ignite this market is if the S&P500 can move over its 200-day simple moving average at 1262. We were turned back there in October, November and again last week. Another try would bode well for the bulls, and we'd likely have some chasing of the breakout if we can generate that sort of momentum.

On the other hand, a break of the 50-day moving average at 1221 is going to embolden the bears and send some hopeful bulls back to cash. We need some upside momentum to develop, and if we can't even hold the 50-day, it is going to be very tough to generate much energy.

I've been leaning bullish lately based mainly on some contrary thinking and the possibility of positive seasonality, but I want to point out that my approach to the market is to be reactive rather than anticipatory. Although I'm optimistic about upside, I'm not acting on that hope right now. I want to see some actual strength before I am more aggressive with my buys. I have a thesis but have yet to act on it.

One of my biggest criticisms of Wall Street is the intense focus on prediction rather than reaction. If you react quickly to changing circumstances, you don't have to play the guessing game. Sure, it can be very profitable to make accurate predictions, but it is also hugely risky. Loading up long based on a bullish thesis at this point could pay off nicely, but is it really necessary to rush to act? Why not wait a little while and see if the action develops the way you think it will? It might cost you some gains not to be in early, but you reduce risk substantially and that may make it worthwhile.

The key to being an effective reactive trader is to have a course of action ready. You don't want to hesitate when conditions are right and things begin to move. You need to have a shopping list in place and have the right mindset so that you can be aggressive when you need to be.

That is where I'm at right now. I have a bullish thesis in mind and I'm waiting to see if it plays out so I can react and be aggressive with some buying. I believe things are developing in a positive manner and if we start seeing a little more energy and some greater buying interest, I'll be moving fast to put my idle cash to work.

Being bullish doesn't have to mean that you are highly invested already. It can simply mean you have a mindset that prepares you to act. If conditions don't develop as anticipated then you simply stand aside.  You reduce your risk greatly with this sort of thinking but you may miss some of the early gains and you have to be ready to act quickly.

We'll see how well this market holds up this morning. We need the dip buyers to show some real resolve and we need pockets of speculative action to develop. I do not believe market players are well positioned, so the potential for a good-sized move is there, if we can gain some traction.

Don't forget we have the Federal Open Market Committee's interest rate announcement this afternoon at 2.15 p.m. EST. There has been very little talk about the Fed lately, and nothing much is expected, but it still can be a market mover.

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