Rev Shark: Caution Is Warranted
12/16/2010 8:41 AM
Caution is not cowardly. Carelessness is not courage.
-- Unknown
Although the indices remain just a few points below their closing highs of the year, they have been struggling lately. We have closed weak quite a bit in the past week, and the action under the surface has been poor, as a number of key stocks have been hit. The bears haven't had much success knocking down the indices so far, but they have done a good job with some important names and the character of the action has shifted.
My mantra is to always stay focused on the price action and to ignore all the pundits who are constantly making predictions about what is going to happen. I believe that you will have better results if you react to the action as it unfolds rather than try to anticipate the future.
Right now the price action is telling us to be more cautious. We haven't broken down, but momentum has obviously faded and we are losing leadership. It may turn out to simply be a pause that refreshes and sets us up for a run into the end of the year, but we can't afford to embrace that idea when stocks are acting the way they are right now. It is incumbent upon us to tighten up our defenses and be ready in case this recent bout of weakness intensifies and we break down further.
In this sort of environment it is particularly important that you focus on your individual stocks much more closely than the major indices. That is always something you should do, but right now the indices are particularly misleading. The major indices are dominated by a relatively small group of big-cap names, and they are often not reflective of what is happening with the average stock.
My screens have been littered with some ugly breakdowns lately, and if you just focused on the indices you would be holding some stocks that you shouldn't. On the other side of the coin there usually are some pockets of momentum to trade on the upside even when the indices are struggling. I noted the rare-earth group of Molycorp (MCP - commentary - Trade Now), Rare Element Resources (REE - commentary - Trade Now) and China Shen Zhou Mining (SHZ - commentary - Trade Now) yesterday, for example, and they are active again this morning.
FedEx (FDX - commentary - Trade Now) posted a poor earnings report and is weighing on the market this morning with concern over a poor bond sale by Spain. Oil and commodities are showing some early weakness but there is a bit of a bounce in the early going.
We'll see what happens on today's economic data, but heightened vigilance and a plan to protect gains is strongly suggested.
Long REE and SHZ, but positions can change at any time.
