Eschew the monumental. Shun the Epic. All the guys who can paint great big pictures can paint great small ones. --Ernest Hemmingway
After a couple of days of weak action, the market looks tired this morning. There is very little news flow and not much interest, but this is exactly the sort of setup that has tended to lead to a quick rebound.
Our challenge is to determine whether the market is finally undergoing a change in character or if the pattern of aggressive dip-buying and immediate recoveries are going to continue. If you have been too quick to embrace minor weakness in this market, you have been burned every time so far this year, but there are some warning signs in the last few days that can't be completely ignored.
At a juncture like this, my tendency is to not try to make the big picture call but to focus on the action in individual stocks and let them determine my market position. If you are sticking with big-cap momentum names like Google (GOOG), Apple (AAPL), Amazon (AMZN) and various PowerShares QQQ (QQQ) names, the market is looking much better than if you are playing small-caps.
Small-caps are at the same levels they were at back at the start of February. Obviously, there have been select names that have done well, but overall there hasn't been much momentum in the group. That has been covered up by the strength in the QQQ, which has moved up sharply in the same time period, largely due to AAPL.
In isolation, the small-caps have actually been forming a good base and there are some decent technical setups, but the problem is that sentiment is largely driven by the big-cap momentum names and if they struggle, it is unlikely the small-caps are going to perform well.
In a market environment like this, it is very easy to let the focus on the big picture make you overly bullish or bearish. Even if we do start to see a more aggressive correction, the likelihood is that it will occur on a rotational basis and we'll still have pockets of positive action while other groups like oil, precious metals, financials or whatever are undergoing selling pressure.
Focusing on the micro rather than the macro can be a very good way to navigate the big-picture worries. If the individual stocks you are holding aren't acting right, take your stops and move into cash. You don't need to agonize over all the arguments about the health of the market. If you aren't finding stocks that are making you money, stand aside until that changes.
In my early days of trading, I paid very little attention to the macro arguments about the market. I stayed intently focused on the stocks I was trading and reacted as they move around. Often times that worked better since I don't' form any bias about the market direction, which is what happens when you listen to the endless yammering in the media each day.
Let your individual stocks be your guide to the market, rather than the soothsayers who have mostly been wrong about this market all year.
It is looking like a quiet day, but that is often the best environment for finding some good pockets of actions.
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