With stocks gapping higher to start the week, it is difficult not to be a little nervous about the potential for some corrective action. The dilemma is that this has been the case for many weeks, and those that have played aggressive defense have suffered tremendous opportunity cost.
Premature bearish has been extremely costly, but it feels prudent as stocks become increasingly extended, and valuations become stretched.
My approach to this market is to forego market timing attempts and stay focused instead on reaction to price action as it shifts. The goal should not be to hold 100% cash at the exact top but to exit as quickly as possible when conditions change and keep account balances close to highs. Once you acknowledge the potential for some losses at a top, it is easier to be more aggressive while waiting for a change in market character.
Many market participants are so fearful of suffering losses at a market top that they will sacrifice far bigger gains with premature market timing.
There simply is no way to know how far momentum will carry. This market has already run far further than many big picture bears have thought possible, and it is still running this morning. Rather than try to predict, we need to react aggressively when market conditions change. Yes, there will be some losses when that occurs, but there should be a large cushion of profits to soften the blow.
The other big issue that market timers face right now is that the great likelihood is that this market will probably correct in a rotational manner. To some degree, we have already seen this as the FATMAAN names have lagged while small-cap stock picking has led. There is likely to be this sort of shifting again when corrective action develops.
The difficulty of timing a top in the indices combined with the likelihood of rotational corrections places a premium on reaction rather than prediction. Navigating this market requires great vigilance and a focus on the price action occurring under the surface.
There is no doubt that the market will undergo a painful correction at some point, but there are still plenty of good opportunities while we wait.
My game plan is to stick with what is working, which is aggressive stock-picking of small-cap names. I'll be watching for rotational action but plan to stay with hot groups like cannabis and bitcoin.
We have a solid open on the way as many recent leaders are gapping higher to start the holiday-shortened week.