Out of the Pool

We wish we could have been more timely with our call to get defensive. It only gradually dawned on us Friday afternoon that the market could be in real trouble. Our tell was BIDU, which along with the imploding Chinese market was the focal point of our weekend cautionary tale.

There wasn’t a lot of time for action between our 3:55 PM EDT epiphany on Friday and Monday’s gap down open. But if you took our advice you exited the market on the first rally back on Monday to limit the damage. We can’t say we are pleased with the yield from our month long foray into long positions. We made money, yes, but sold well off most stocks’ recent highs.

But this is the game we play. We make propitious entries when we believe an uptrend is beginning and look to position ourselves for an extended run to big gains in what we feel are the best stocks the market has to offer. History teaches us that this is a reliable way to make big money when a market turns bullish after a bear correction.

This approach has not yielded stellar results this year. The bounce off the March lows has been best played by buying badly down stocks left for dead and watching them as much as quadruple. The safer but still profitable alternative would have been to just buy the major indices themselves.

The jury remains out on whether we have experienced a bear market rally or the beginnings of a new bull market. After the 2002 final bear market bottom stocks bounced but didn’t make spectacular gains for five months. It’s been about that length of time since the March 2009 lows so bulls can make the argument that leading stocks might only now be set to gain steam.

Bears can point to a horrific bear market that took place over a period of about sixteen months, perhaps not enough time to digest the stunning losses realized during this rout. Juxtapose this to the thirty one months of the 2000 – 2002 bear. They can also point to narrow leadership that for the most part has provided only halting gains.

Ours is an alchemy of reading charts and interpreting economic conditions. For now the clearest path is down for the indices but beyond the next couple of weeks we need more clues as to market direction. We’ll continue to post our thoughts as those clues come to light, and recommend trades on our companion site, long or short, when we see the opportunity to make good gains.