Wait for the Action to Shift

 | Dec 14, 2011 | 8:37 AM EST  | Comments
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"Hope for the best, but prepare for the worst." --English Proverb

After a disappointing day Tuesday, the market is gapping down as the euro continues to break down. Some are blaming the weak action on the failure of the Federal Reserve to make any moves yesterday, but none were expected. The real reason this market is struggling is because we still have no clarity in Europe and there doesn't seem to be any major solution forthcoming.

I've been hopeful that we might put Europe aside and manage a little upside action into the end of the year. Sentiment is negative, market players are poorly positioned and in need of relative performance, and positive seasonality is at its peak. The technical picture isn't great -- but it isn't bad, either. The conditions for some sort of contrary action are good but, so far, there are no signs of buying interest. Those who have been anticipating a rally have been caught leaning the wrong way.

The biggest obstacle for the bulls lately is the lack of energy in this market. Many market players seem to have given up and there is very little, if any, speculative action, momentum or leadership. Traders cannot get anything going, which causes discouragement and moves more money to the sidelines. We need to see a break in the cycle of dead action and discouragement. If and when that occurs, we should see a decent spike.

The good news is that this lack of interest and downright negativity creates a big pool of potential buyers, but that is irrelevant unless they want to buy. Many market players like the idea of betting against the crowd but the vast majority of the time the crowd is right. The way to make money is to run with them as long as you can and then change direction when things are too stretched and we rebound in the other direction.  

One of the easiest things to do when using a contrary approach to the market is to move prematurely. Folks who try to call tops and bottoms are always early. They are convinced a turn is coming and they move too fast.

The way to guard against this is to wait for the action to shift. Instead of making big bets that a shift in the market is going to come, wait for an actual shift and then act. Sure, you will be a little late and miss out on some gains, but that is cheap insurance.

My strategy for dealing with this market is to assume the worst, hope for the best and not act until there is some positive action. I've been maintaining a positive mindset about some good end-of-year action, but have not had an opportunity to act on that thinking since the price action in the market is so poor. I buy when stocks are positive, not because I'm hopeful they will be.

We obviously have major headwinds with Europe, and the market doesn't seem able to move past that for even a little while. I'm going to continue to watch for signs that the focus is shifting and I'm prepared to act, but I have no desire to fight the bears right now.

German Chancellor Angela Merkel is giving a speech this morning, and that has taken us off the early lows, but it is going to take more than some slight green at the open to draw in buyers. Stay defensive, but be ready to act. The chances of some sort of year-end rally are still there. We just have to be patient and see if it develops.

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