Wednesday, November 20, 2013

Picking Tops in a Strong Market

We are in the super bull phase of this 5 year long bull market.  During this phase, it is tempting from a valuation and overbought perspective to short the market when it looks shaky.  But it is actually dangerous to short a strong market like this after it has already gone down 1%.  Because these are the type of markets that can slowly grind higher, not giving investors a chance to cover on a bigger dip, forcing you to either hope for a drop or get tortured with a 1000 cuts as we go higher bit by bit.  These kind of grind it up bull markets drop quickly out of the blue, but the drops don't last for long.  So you will have many more up days than down days even when the market is mostly flat.

The best approach for this type of market is to either wait for the market to flatten out for a few months, and then strike on the short side, or just buy the dips.  It is still the best strategy, even though it is well known.  Because right now, so many are still looking for dips to buy stocks, and the market just hasn't offered many to investors over the past month.

The market feels toppy, but I won't fall for the trap to short it here.  I will wait to buy the dips.  And will only short rallies when they get overbought to a truly extreme level.

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