A Little Momentum? To The Downside

Stock markets don’t go straight up.  This we know.  They bounce around but generally have a direction which is where moving averages can help.  Many of the various moving averages are still moving up right now and the general direction of the market is still up as well.  In the last few days, you’ve seen a tug of war between bulls and bears to battle out the future direction of equity prices.  There’s still no clear winner.  So, is it time to run sell and run for the hills?  I don’t think so.  As a trader, you have to give the markets room to breathe.  You might say, why should I give the market any room to breathe?  Why not just trade in and out and be more active?  It all depends on how much volatility you think there’s going to be in a move up or down.  If the moves are small, you run the risk of buying high and selling low.  That’s whipsaw risk.  That’s the market I think we’re in right now.

In just a couple of days, everyone that was bullish is now turning bearish.  It’s amazing when you read articles and watch various people on television.  “China’s slowing down, the economy stinks, the S&P’s going down to 850.”  Investors are an emotional creature.   

Depending on the market, you have to adjust your trading style.  Several months ago, I was writing that when the market flinches (like the bully in school), you better sell (duck)… just in case (he hits you).  That was then, this is now.  The technicals and internals have improved since then and the indices are higher as well.  But, because the internals are still improving and the economy is still improving, I’m adjusting my trading style and slowing down my trading. 

If the indices continue their pullback, what are some logical levels?  I think the S&P could easily pull back to the 940-960 level.  That’s about a 4-6% pullback.  That’s both reasonable and no reason for me to sell.    So, I continue to watch every position I own but I’m giving them a little room to bounce around.  It’s like letting your teenager stay out a little later.  You are building trust.  The market has proven to me that things are truly better and it deserves a little more of my trust.

With that said, I can keep some core positions but trade in and out of some other securities.  Having multiple strategies in a portfolio is very appropriate.  Despite a 50% move up in equities and my more bullish tone, this still isn’t a buy and hold long-term bull market.  This is a cyclical bull market that is discounting the fact that the economy is gett better.  That’s it, period.  So, we have to manage the portfolio keeping that in mind. 

This post published at www.karleggerss.com

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August 2009
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