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  • Rev Shark:

    Sidestep Greed as Market Heads for Purgatory
    1/12/2006 8:48 AM EST

    If your desires be endless, your cares and fears will be so, too.

    -- Thomas Fuller

    The predominate driving force in all markets is fear. Fear of suffering losses is one we are all familiar with, but the other form of fear is more commonly referred to as greed. Greed is simply the fear of not participating in future gains.

    The interesting thing about human nature is that the fear of missing out can actually be a much stronger driving force than the fear of suffering losses. The frustration of watching others make money while you sit idly can be even more painful than an actual, real money loss. That isn't particularly rational, but it helps explain why so many people ride stocks down for long periods of time. They simply are afraid that it is going to reverse back up and they won't be there to participate.

    After seven solid days for the Nasdaq, the fear of being left out of further gains is dominate. We saw this play out yesterday and market participants tripped over each other to snap up some very hot big-cap names, which have already made huge moves. These buyers aren't driven by careful analysis of the relative value of the stocks or the favorable chart patterns. They are driven by the fact that these stocks keep going up and they aren't part of the action!

    It is important to take a step back and contemplate what is driving your actions in this market. Are you frustrated because you haven't been fully invested and have missed out on good gains? Are you feeling like everyone else is doing better than you and you better get busy or you will be a real failure? Does it feel like everyone is going to ride this market to the moon and leave you wallowing in skepticism and doubt and no profits to show for it?

    Experienced traders come to learn some very simply things about the market. First and foremost, they go up and they go down. Just when it feels like the rules of logic have been suspended and the market will continue to move in the same direction forever, a reversal kicks in. They always do. We won't know when and why, but the great likelihood is that the market will give back a good portion of recent gains at some point in the near future.

    But even if that doesn't happen and we end up with a frenzy of buying like we had in early 2000, that doesn't mean you are precluded from participating. Even when markets are going straight up, there are still opportunities in a range of stocks that have not already taken off. Every day, even in the strongest rallies, there are stocks that offer reasonable entry points. The biggest mistake you can make is to let the state of the indices convince you that there are no good trades in individual stocks to be found.

    This morning the battle between powerful momentum and extended market conditions continue. As I noted yesterday, the lagging breadth and small-cap stocks raised my caution levels. That doesn't mean the market is going to hell in a hand basket, but it may spend a little time in purgatory and do nothing of great consequence.

    We have a fair amount of downgrades on the wires today, which isn't a big surprise, given some of the recent moves. European markets were mostly lower over night, but Asia continues to hit new five-year highs. Oil is challenging the $65 level again and we have a pullback in gold.

Teemade nimekirja