No Place to Hide From the Weakness

The major indices have been struggling for over a week now, but the big change today was that there was no place to hide from the weakness. The pockets of momentum that have been offerning some great trades disappeared and turned into pockets of despair. Most of the stocks that have been rewarding momentum traders recently pulled back sharply. The biotechnology sector was particularly dangerous today after some great upside earlier this week.

This sort of reversal excites the bears, who keep waiting and hoping for downside momentum to build, but these bouts of selling generally haven't lasted too long. Traders shake off the negativity and are quickly on the hunt again for the names that will outperform.

There are legions of market timers that are anxious to declare that a major top has been formed. It is understandable that they want the glory of making a precise call, but it has been a costly game to play.

The smart move has been to assume that the pullbacks will not last and that downside momentum is limited. If you are wrong, you may suffer some losses. But if you have stuck with the momentum while the bears were predicting disaster you should have a very sizable cushion to help handle a day like today.

I've taken some hits today and gave back a good portion of the gains I had yesterday. That is disappointing but I'm much further ahead for sticking with strong stocks. That is how it works when you are playing the momentum game and take partial profits into strength.

We'll see what the bears can do now that they have shut down some of the individual stocks that have kept momentum positive. The action today should have triggered some stops and caused you to raise cash levels. If the character of this action is making a major change we will know very soon. I'm not convinced yet that a major downtrend is starting.