"There is a great difference between worry and concern. A worried person sees a problem, and a concerned person solves a problem." --Harold Stephens
The market has been flashing warning signs lately as small-caps have struggled and the action has been weak under the surface. Big-caps have held up relatively well and that has bolstered the indices, but this morning it looks like the negatives are starting to matter more.
The catalysts for selling being cited by the media are that Greece may not be able to live up to its recent sovereign debt deal, increased worries about the pace of economic growth, and fear that the end of government-produced liquidity will hurt the market. None of these concerns are any great surprise, but for whatever reason, the market, in its great wisdom, has decided to embrace those worries this morning.
The primary issue for us to contemplate is whether this is a temporary setback that will be quickly brushed aside or the beginning of a significant change in market character. The market has been ripe for some sort of pullback for a while but the bears would like us to believe that this is a major top and not just some healthy and temporary profit taking after a big run.
What makes navigation so tricky is that ever since the low in March 2009 the market has had a tendency to come roaring back just when it looks poised to correct more aggressively. The bears become anxious for downside, the bulls become nervous and everyone is caught by surprise when the market suddenly reverses and the negatives are forgotten again. It has been a reliable pattern and it has to give the bears second thoughts when we finally do have a weak open.
What is particularly frustrating for the bears is the negative arguments have been ignored. Suddenly, the market seems to be paying attention to the pessimism but in a matter of days, we are right back where we were and the negatives don't matter.
Let's not forget that there have been two deep corrections since the March 2009 low and both times the tops came in the spring as seasonality turned less favorable. We ended up with multi-month downtrends before we bounced back in typical V-ish fashion and made new highs, but it was painful if you didn't make some defensive moves when those corrections developed.
It is important not to be too sanguine and overly confident that dip-buyers will continue supporting this market. We have warning signs that demand attention. They may turn out to be nothing significant, but job one is to protect capital.
In my approach to the market, my first priority is to keep my accounts as close to their highs as possible. That requires systematically taking profits when I have them and aggressively cutting losses before they grow. I'll be inclined to err on the side of selling too early because I view it simply as a cheap form of insurance. If the market regains its footing, I may rebuy at higher prices but I see that as an inexpensive way to make sure my accounts don't slip much.
I'm going to ramp up my defenses and focus on not giving back any recent gains. If the market regains its composure and turns upward, I'll work hard to find more long exposure but I'm more concerned about not losing money than I am about missing out on further gains.
We'll see if they can bounce us back from this poor open, but even if they do, we obviously have some issues that may develop into something dire over time.
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