Let me explain how I view the markets. I try and chunk down the information (charts, sentiment, indicators) into small bits and try to give it some structure in relation to the bigger picture and then trade my plan around that structure. For example, we’ve been in a downtrend for all of February, and as the market declines it reaches a point or crossroads if you will, where the market must decide its new direction. It can reverse course or fall further turning into a much longer decline (which is what is happening currently).
As the market continues to fall, investors begin to guess where the market is going to reverse and begin buying stock in hopes of catching a bottom. Many times when the market falls below an imaginary line that you’ve predetermined, where it must suffer a significant one day loss (flush out), before it can move higher. I continue to feel that we are in one of those stages right now where market sentiment has to reach a certain frenzied level and flush out those holding on, before we can move higher. In my opinion, that is why every rally has been sold this past week, as there is no confidence that an upmove can be sustained and no strength behind the buying.
There really is no good reason to get long when the markets are dropping like they have been. We couldn’t even manage to hold yesterday's gains on the heels of Monday's big sell off. Going long yesterday was like trying to short the markets in the late 90s and we all know how that would have turned out. The chances of timing it perfectly and being able to hold through short term pain is unlikely. John Maynard Keynes said ”the market can remain irrational longer than you can remain solvent” and that is an excellent point to always keep in mind when trying to pick tops and bottoms.
The biggest reason to go long right now is that we are so oversold that we’re bound to bounce. True, but a very hard strategy to consistently win at. Until I see a clear edge in being long which will coincide with extremes in my indicators, I’ll likely remain short, or possibly move to cash if I get caught in a strong rally. One thing that will help me sit through a rally is that I’ve been covering shorts and taking profit on the way down.