I constantly preach that the best way to time the market is to react to price action rather than try to anticipate twists and turns based on a variety of arguments.
Like most things in investing, that isn't always as easy as it sounds. It is great in theory, but measuring price action can be quite murky at times.
The current market presents a good example. There is absolutely nothing wrong with the price action. The trend is upward, the indices are hitting new highs, and there are over 300 stocks at new 12-month highs.
That is solid action and there is nothing to signal that a turn is about to occur.
Despite the generally positive action, I'm struggling trying to find new stocks I want to buy. In fact I'm finding more stocks that I want to sell than buy, which means my net exposure to the market is decreasing. That seems inconsistent with my admonishments about respecting the price action, but ultimately it is the action of individual stocks that matters most.
My number one goal as a trader is to keep my accounts as close to highs as possible. Not having to make up losses is how you generate the best returns over the long run. It also allows active traders to benefit from the power of compounding.
There is an inherent tension between keeping accounts as close to highs as possible and staying with a trend as long as possible. When a trend ends, the losses come very fast, so it can be good strategy to cut some strong stocks into strength rather than wait for reversals to start.
At the current juncture, I find that I'm focusing on taking more profits into strength as many stocks become extended on lighter volume.
They may continue to trend higher and I like keeping my accounts at current levels after a good run and will focus on that.
It is becoming harder to find new buys, and that makes me think that we are going to see some basing action fairly soon.