Some of this and that

The market has been acting as I've been expecting it to. Here we are now at DOW 11K and SPX 1200 (close enough). Retail bears have been all but slaughtered (yet again) during the past several weeks with their April puts. The market has climbed the proverbial wall of worry by overcoming bank regulation fears, deficit fears, PIGS fears and socialism fears a.k.a the passing of the health care bill. All these things are temporary distractions from what the market really cares about....earnings in the next 6-12 months. Earnings have been surging and now and with job figures turning from negative to positive we are near an inflection point where a large cohort of pessimists/skeptics are going to have to concede sooner or later and that's going to fuel the next leg up.

Are we still in the multi-month consolidation phase of the bull market which I alluded to in coming into this year? I think so. I hypothesized that the during this phase marginal break out above 1150 was within the parameters but if we keep going another 2-3% higher my consolidation phase call could very well be invalidated. Job gains are likely going to come in fits and starts and there’s the potential now for some sort of “sell the news” reaction to good earnings.

With the fears noted above overcame, the market now needs some other battle to fight. The market is indeed quite overbought and has been for a few weeks now. The good thing about this is that it's indicative of bull market behavior the bad thing is that eventually this condition will be alleviated via sideways or downside action with the potential for a large percentage of the gains attained during the past several weeks to be wiped out within 1 week or even less. But that's the way bull markets work....slow steady and often relentless climbs followed by short but sharp corrections.

So, what's going to be the next catalyst a.k.a "excuse" for the market to sell off? A sell the new s reaction to earnings can only go so far….there needs to be some sort of new thing to “worry about”. I speculated that it may be China slowdown fears. Although there has been talk about a China bubble, no solid evidence of even a slowdown has come about…but that might change soon. It doesn’t have to be China…the catalyst could be anything really such as Obama opting for boxers instead of briefs. What tends to happen is that once enough weak bears have been slaughtered and weak longs have been sucked in the trap door for a correction will be sprung due to even the flimsiest of excuses. But as I've mentioned before....you shouldn't concern yourself wasting too much time and energy about short term corrections in a bull market. Big money is made riding big trends and if try to time every dip in a bull market sooner or later you will be left on the sidelines as the market takes off without you....that's just the way it goes. You will have a hard time beating buy and hold during a bull market. Having said that though, I believe the prudent thing to do is to have a LT core position and a trading position for any LT holding. The trading position can be used to take profits or hedge after strong run ups. The core position is to never be touched no matter what until LT fundamental conditions are expected to turn soon or temporary euphoria has caused the stock to reach extreme overbought levels with the price getting far ahead of what is justified at the time being....in those cases the risk of a severe pullback and consolidation makes it worth selling the core position.

In my next post I'm going to talk a bit about gold.