I have been writing quite a bit recently about the tug-of-war in the market between the bulls and bears. The bulls have been mostly winning the battle as price action stays strong, and a number of economic issues are being ignored or spun in a positive manner.
The bears are convinced that some major pain is coming when the market is forced to recognize that rates are going higher for longer and there is the potential for a sharp drop in corporate earnings.
Although there are some very strong views about where the market is heading, no one knows for sure, of course, what is going to happen. We could easily see further upside on a wave of liquidity, underinvested longs, and a Goldilocks economic scenario.
On the other hand, the economic issues ahead are indeed daunting, and the bearish arguments are not only logical but compelling. Given the Fed's track record, it is difficult to believe that it can deliver a soft economic landing and control inflation without doing more damage to the stock market.
So how do we deal with this difficult market?
1. Stay focused on priced action, and don't become too invested in the bull/bear debate. Price action is the only thing that really matters at the end of the day, and if you stay with it, then you will be on the right side of the action. If the bears' thesis starts to gain traction, we will see it reflected in the market very fast. I'll be discussing this on a daily basis and will stay highly reactive to shifts in the character of the market.
2. Be clear about whether you are a market timer or a stock picker. If you are trading overall market direction, then you will likely approach the market quite different than someone that is picking good stocks to hold longer term. Currently, we have a market that is mostly macro-driven, so stock picking isn't going to protect you very well if action turns negative. The most important issues impacting the market right now are economic news and the Fed, which renders stock picking far less effective.
3. Stay very selective with stock picking and manage positions tightly. If the market turns down, even the best individual stocks won't offer much protection. That may lead to good bottom-fishing opportunities, but the drawdowns can be extremely painful, and you have to be very aware of the risk.
One example of an individual stock that I'm adding to today is CECO Environmental (CECO) . The stock has been forming a strong base after it preannounced substantial fourth-quarter earnings.
CECO has increased EPS for four straight quarters and is likely to continue that trend in the fourth quarter. The combination of a good technical pattern and a solid valuation makes this a stock that I am confident in. However, it trades very thinly, and that means it can sell off hard in a bad market environment.
So to sum things up, my strategy right now is to respect the price action and forego predictions but be aware of the arguments. I will make some market-timing trades, but my main focus is on stock picking and watching for opportunities that develop as the overall market goes through its gyrations.
