Thursday, January 06, 2011

Why we hate predictions

Crude is down 5% from its highs earlier this week, gold down 4%, and silver down over 7% and yet the Nasdaq hit a new high today.   The Nasdaq being a better comparison than the S&P 500 as it doesn't contain nearly as many commodities and is the "momentum" higher beta index.  Financials are not even 1% away from their highs.

This is evidence, thus far, of classic rotation.    The big million dollar question of course is IF the commodity sell off accelerates, will the market finally be pulled down?    However, attempting to predict the answer, for our type of trading, is completely irrelevant. 

This is all we do:  everyday after the close we go through a core set of stocks looking for set-ups.  We add alerts, put them in newsletter, send it off, and then trade accordingly the next day.   If market starts to crack, we'll see it in the set-ups. 

Don't worry so much about the big, bad correction.   All markets correct, and eventually we'll get one, be it next week, next month, or next quarter.   But it won't happen instantly -- you're not going to wake up to a 5% gap down and then see market die for next 3 months.   Trends as strong as this one are like giant ships -- it takes a while for them to turn around.  Thus far we've had an important red flag and that's the commodity weak price-action.  Commodities are often early indicators of corrections, but not always.  Basically,  as long as there's no contagion to other non-commodity sectors, it cannot be construed as bearish for entire market.

Before getting grizzly bearish we'd want to see financials die, tech leaders such as AAPL GOOG get hit hard, transportation stocks roll over, and most importantly, we'd want to see support buying cease to work.   Bear markets don't care about support.  They eat them for breakfast.  Support buying is our specialty and we'll be the first to know if it ceases to work.   Until that (very sad day) occurs in that we get stopped out on our support buys instead of seeing green, we'll be buying the dip on oversold sectors hitting support.    

So relax, take it one day at a time, and don't worry about predicting anything.   Just watch the price-action, trade your set-ups, take your profits, respect your stops, and trade accordingly.  That's it.  And leave the market predictions to the CNBC "gurus".