Rev's Forum: Anticipating Disaster Seems Smart but Carries a Hefty Cost

 | Sep 15, 2017 | 7:57 AM EDT
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"I've suffered a great many catastrophes in my life. Most of them never happened."

--Mark Twain

After two days of gains and two days of consolidation the indices are set for a soft open this morning. News that North Korea has fired yet another missile over Japan and a terrorist attack in London are providing an excuse for some selling, but dip buyers are lurking and the market is now in even better shape than earlier this week as overbought conditions have decreased.

We are at a juncture where it is important to decide whether you are going to use an anticipatory or a reactive approach to the market. There have been many anticipatory bears out there for a long time who believe a major market top is going to occur. They have a long list of very good arguments, but the market has refused to cooperate.

Calling a top has been very costly. Even if you are not shorting but simply have been sitting in high levels of cash, there is a tremendous opportunity cost. You are missing out on the gains that are occurring while waiting for the pessimistic thesis to be fulfilled.

I believe the bears have some very good arguments and that there is a high likelihood of a correction very soon, but I'm not going to act on that feeling until I see something convincing in the price action that illustrates the market is finally paying attention to the pessimists. Formulating a bearish thesis is extremely easy to do, but acting on it without some proof that the timing is right is just plain foolish.

The best thing you can do in this market is to set aside your personal opinions about the market. Don't be highly bearish or bullish. Be an opportunist who focuses on what the price action is saying day to day.

So much energy is expended on making market direction calls while the big money is being made in individual stocks. Over the last couple days the S&P 500 has been almost exactly flat, but if you have focused on stock picks there have been some great opportunities. My Stock of the Week, Square Inc. (SQ) , which I posted before the open on Monday, is up close to 8% and there were good opportunities every day this week. Ultra Clean Holdings Inc. (UCTT) offered a great setup and leaped 5.5% yesterday.

Formulating a grand market thesis may be appealing if you want to be the hero that nails the exact moment the market hits a meaningful top, but it is not a reliable way to produce returns.

To make money in this market you need to focus on individual stock picking and take a reactive approach to the indices. Stop trying to anticipate disaster. The market will let us know when it is time to play it safe.

We have some weakness this morning and overseas markets are mixed. We'll see how much support there is out there, but I'll stay focused on managing individual positions rather than predicting market direction.

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