Watch for Signs of a Crumbling Market
11/11/2005 8:39 AM EST
"So you are lean and mean and resourceful and you continue to walk on the edge of the precipice because over the years you have become fascinated by how close you can walk without losing your balance."
-- Richard M. Nixon
When the market has been moving up as quickly as this one has over the last couple weeks, it is reasonable to be increasingly nervous that we are due for a sharp correction. The laws of gravity still apply to the stock market and eventually stocks that go up will come back down. The question is when and to what extent.
We have to decide how long we want to continue to walk on the razor's edge as the market becomes increasingly extended. Do we start anticipating the inevitable pullback although there are no signs of one yet? Do we look for macro arguments to justify a more bearish approach in the face of powerful momentum?
The nice thing about the market is that, unless there is some surprise outside event, it usually gives us some warning that it is ready to begin correcting. We can continue to walk the edge as long as our senses stay keen and we are ready to take action at the first sign of trouble.
Too many market participants have been trained by traditional Wall Street to be overly anticipatory. They encourage you to rush in too early when the market is downtrending, and to bail out too fast when we are in an upswing. Their primary motive is to be the hero who calls the exact turning point but more often than not they simply lead us to miss out on substantial profits because they call the top or the bottom over and over again before they eventually get it right.
I have found in my trading that the way to maximize profits is to stick with the prevailing trend, riding the wave of momentum even when it feels extended and dangerous. The time to run for safety is when things begin to crumble. When breadth slows, support levels erode and momentum cools, then you reduce your risk and protect your gains.
What often feels like the late stages of a rally can produce some of the best gains. If you are overly cautious you will miss out, and quite often you will miss out big because you will be out very early. You can often profit far more by running for safety only after some real danger actually occurs. In the stock market it is often better to be late than early.
We have an upbeat open on the way. Dell is helping matters a bit with a buy-back and yesterday's intraday reversal seems to be enticing buyers. Overseas markets were perky and oil and gold are down a little this morning.
Position: No positions in stock mentioned
