Rev Shark:
Work Cut Out for Us
11/22/2005 8:59 AM EST
"The place where optimism flourishes most is in the lunatic asylum."
-- Havelock Ellis
The market has been so strong lately it would be crazy not to feel a little concerned about how much longer this run can last. As is so often the case, we don't want to be overly anticipatory and look for a downturn when the momentum is running hot and heavy.
It is extremely important to maintain your objectivity in a market like this. The minute you start to think we have no where to go but up you are setting yourself up for a painful lesson in the contrary power of the market. The one thing that the market gods frown upon the most is certainty.
The proper market approach here is one of cautious optimism. The technical action is good, momentum is hot, the dip buyers are aggressive, performance anxiety is running high and we are in one of the best times of the year seasonally. There are a lot of positives to be found.
However, there are also some warnings signs we need to watch carefully so that we can hit the eject button if the tide turns. Foremost is the rather extended position of the indices. We have been going straight up with nary a rest and that increases the chances of a sharp reversal. We have to watch carefully to make sure pullbacks and profit taking don't turn into a freefall. If the dip buyers suddenly decide to hibernate and bids dry up we can fall fast and hard and give back many days of hard-fought profits.
Another concern here is the state of market leadership. Yesterday the precious metals and oil stocks led the market while semiconductors struggled. We need strength in groups like technology, retailers and banking for the market to continue to make a sustained run. Gold at nearly $500 an ounce is not a positive for the broader market.
While we should take some comfort in the market positives, we also need to keep our vigilance high. Hanging on to the majority of your gains when the market does turn down is what will separate average returns from superior ones. We have our work cut our for us as we continue to walk the high wire.
We have a soft open shaping up. Overseas markets saw some profit taking and oil and gold are continuing their run.
Gary B. Smith: