To be an effective trader it is necessary to distinguish between negative news and negative news that the market cares about. In every market there are very logical and compelling bearish arguments. Typically, the bear arguments sound much smarter and rigorous than the hopeful optimism of the goofy bulls.
The ability to effectively navigate the market does not involve understanding what horrors await, but rather determining whether and when the market gives a hoot about them. A day doesn't go by when we can't list a long list of potential disasters, and if that is what you focus on you never will want to be long the market.
Most of us can predict what is going to cause the next bout of corrective action in the market. It is likely to be worries about trade with China, concern that the Fed may not be sufficiently dovish, fear that a recession is brewing or maybe some poor earnings and guidance as fourth-quarter earnings season starts.
The potential catalysts are the easy part. Trying to guess if and when they might matter is the hard part. The only way to time the impact of negative developments with any precision is to focus on the price action and let it tell you when the market is starting to shift the way it thinks.
One of the most interesting things about the recent corrective action is that it didn't occur because of one very clear reason to drive the action, such as worries over subprime lending or Internet valuations. There was a confluence of events that were all a bit vague.
All those negative issues now seem to be resolved to some degree, but the potential that they will flare up again is quite high. When that happens is the $1 trillion question.
From a technical standpoint the indices have had a substantial bounce off the Dec. 24 low; they are now technically extended and running into some overhead resistance. It makes sense that they pull back or consolidate as we head into earnings season.
However, as I discussed on Thursday, it is very easy to lose money if the premise for your moves is based on what is reasonable. The market's idea of what is reasonable is quite different from what most of us might think. Even if we didn't have money on the line and are totally objective, trying to guess what the "reasonable" thing is for the market to do isn't a good approach to predicting what will happen.
At this point it isn't theories about what will cause the next batch of news that will help us the most. The thing that will help us the most is simple vigilance. We need to watch the action, read the news and be ready to adapt as conditions change.
The fortune tellers in the media will keep yammering and they will brag about their predictive skills when the market inevitably pulls back again, but there will be no precision in timing and it won't help us much.
I'm not seeing much opportunity in individual stock picking at the moment as many stocks are extended, but there is underlying support and that is the key right now. When we see a lower low and a weak close, then it will be the time to worry about all those negative things once again.
We have a little red on the screens in the early going as the media start to play up the potential for a poor earnings season.