Check Yourself Before You Wreck Yourself

The wishy-washy nature of the current market continues to show today, with a massive gap higher this morning supposedly based on rhetoric out of Europe. In reality, sentiment had become quite negative, and as we had been observing many times in this blog the S&P 500 held above its July 12th lows for a series of higher lows since the June 4th bottom. I suspect plenty of the cocky and self-professed expert short-sellers were caught pressing when they should have been backing off the action. On that subject, let me be clear that I think short-selling is a key part of the market structure in terms of adding liquidity. I am also of the belief, though, that the “Uptick Rule” should be reinstated.

I can just as easily be 100% short in my portfolio as I can 100% long. Much of what dictates my portfolio allocation and market posture revolves around the technicals. With the 200 day moving averages on the major index charts still clearly rising, that is usually not an environment where it is correct to be aggressively short for swing trades. Reason being, the market is telling you that it is still in a cyclical bull run, and even during corrections cash is usually the better bet than trying to nail every short-term top.

Since starting this blog, I have been labeled both a perma-bull and a perma-bear at times, as well as being without risk tolerance at other times. Of course, those critics have failed to closely follow my work over the years, where I have been so fully long during sustained uptrends that I scared some of my readers who thought I would always be sitting in cash. In reality, when you are labeled all sorts of things as a trader you should take it as a compliment that you are dynamic enough to shift with the markets. Bear in mind, plenty of the intelligent-sounding bearish traders you might see on your local Twitter stream have been caught leaning heavily short at the bottom each of the past several corrections since March 2009. Oh, and if you think I am picking on the bears, just wait until the next cyclical bear market with a declining 200 day moving average and I will be ready to throw down with bulls. If you think I am here to make buddies and be everyone’s best friend, you have come to the wrong blog.

The market is now off its session highs, and there are still plenty of technical hurdles to clear for the bulls. First and foremost, actually holding and closing above 1357/1358 on the S&P is the challenge for longs. There are plenty more earnings reports to get through as well, and many damaged charts need to firm up in order for me to be an aggressive buyer. Nevertheless, it does not follow from that analysis that shorts must be correct. Seeing shades of gray in a washy-washy market will help you check yourself before you wreck yourself.