Dangerous Temptations

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We are seeing another pretty strong bounce in the broad market this morning, particularly when you consider that we hit a low of 1357 on the S&P 500 on Tuesday. So far today, the S&P hit a high of 1383 and is punishing bears who tried to short into Tuesday’s weakness. If anything, the action over the past week emphasizes the value of occasionally moving to a heavy cash position when the market flashes signs of becoming more volatile. It is easy for daytraders to claim that they are always winning, catching every minor top and bottom, but trading and blogging transparently in real-time for all the world to see usually has a chilling effect on those superstar daytraders’ free speech.

While the bulls have recaptured 1380 on the S&P, I am looking for them to actually hold above it for longer than an initial bounce. I have been monitoring a bunch of stocks that have held up well, but am not particularly in a rush to pounce on them just yet. The old Wall Street adage of “when in doubt, wait it out,” appears to apply to the current market. We may very well have already bottomed, and if that is the case there will be plenty of time to hop back in.

If, however, we are still working through a corrective phase, then there is a very high risk of another rollover. The main advantage of a cash position, apart from preservation of capital, is a clear head and an objective frame of mind. Regardless of whether the bulls or bears win this next round, I will be ready. As the market direction became more of a coin flip in recent weeks, I backed off the high probability trade, which soon became anything but. I am looking for a new edge to emerge.