Acceptance Phase

You can feel the change in market tone as the weeks go by without a pullback, and we grind a little higher.  CNBC is getting a bit more bullish, but reluctantly so.  They are slowly going from denial to acceptance.  It seems like they want to see all the earnings come out and then they will jump in with both feet.  A suddenly strong oil market and big rallies in China, Japan, and Europe will do a lot to brighten up the investor sentiment.  This is more of what we need to see to form a top.  You need more investors buying into the rally, adding equity exposure, pushing prices higher, to set up a rug pull later.

The fundamentals remain the same, you just have waves of optimism and pessimism that obscure the long term trajectory.  I believe that trajectory is down.  I could be wrong, but rich valuations, low global growth, and the lower highs and lower lows over the past year in the S&P, Eurostoxx, Nikkei point to odds favoring a down market vs an up market.  This long term view will not be shaken easily by the news of the day or short term price moves.

If I am wrong, and the market goes on to make new all time highs and spurts towards SPX 2200, then I will probably be taking some fairly big losses.  If you want to make a lot of money in this business, you do a lot of competent research, then take a view, and don't be shaken so easily by the short term fluctuations.  The key is to do competent research.  Any knucklehead can have a market view.  It is figuring out which scenario is the high probability, high return one which is the hard part.

I don't agree that you should not have an opinion and just be a slave to short term market action.  I hear the cliche, "trade what you see, not what you think."  That just tells me that you belong to the church of what's working now without any thought to fundamentals.  That is how you get killed in this business: following the crowd into flawed long term trades.

We have a healthy gap up with a surging emerging markets, Japan, and Europe.  I would be a short term seller here, looking for another pullback later in the week or early next week.  As things look better, I am feeling more bearish by the day.  After the last wall of worry, the earnings reports finish up later this month, along with the return of stock buybacks, we could form an exquisite top in early May as investor enthusiasm returns.  That is the near perfect setup that I am waiting for.