Market players always have to be careful about the dangers of data mining. With data mining there is a tendency to look only for evidence that supports a prevailing bias. Bears look for negatives, bulls look for positives and objectivity goes right out the window.
In the current market it is extremely easy to fall into the data-mining trap. If you want to confirm a bullish bias just focus on the indices that are in an uptrend and not far from all-time highs.
If you want to justify a bearish bias then focus on the relative weakness in the Nasdaq, the high number of individual stocks hitting new 12-month lows, the technical distribution that is taking place in the Nasdaq, weakness in financials and semiconductors and a number of other things.
It is easy to craft a compelling and logical argument for both sides of the never-ending market battle.
The reality is that the market action isn't clearly bullish or bearish. It is a mix with some good elements and some bad. If you want to find positive action to trade you can find it, but if you want to find reasons to worry about what will happen next, you can find plenty of that as well.
One of the biggest dangers in this market environment is foregoing positive opportunities because we dwell too much on what disaster may eventually occur. There is a tendency to underestimate what is called "opportunity cost." Not understanding opportunity cost is one of the main reasons many market participants underperform benchmark indices.
Opportunity cost is the loss of potential gains when you choose one alternative over another. If you decide to embrace a bearish market view and stay in cash or go short you may incur a significant opportunity cost when the market continues to trend higher.
This loss of opportunity is seldom discussed by anticipatory bears that keep predicting a market top. The amount of money that is lost waiting for a disaster is often far greater than what would be lost if you didn't act until actual weakness occurred.
My theory of the market is that it is better to stay with strength as long as possible because the opportunity cost of anticipating negative action will usually be much higher than most people think. Opportunity cost is often far more than actual losses.
In the current market it is extremely easy to make a case for why we should be anticipating some difficult action ahead. Just read Doug Kass on Real Money Pro or any of the other anticipatory bears. They will tell you in very persuasive ways why we are heading for major problems. Sooner or later they will be right but the opportunity cost of acting too early is substantial. Stick with the positives as long as you can.
We have a positive open on the way as Asian markets bounced overnight.