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  • The Danger of Dogmatic Conviction

    By Rev Shark
    RealMoney.com Contributor
    2/13/2006 9:19 AM EST

    Timing, degree and conviction are the three wise men in this life.

    -- R. I. Fitzhenry

    One lesson many market participants learn from listening to market pundits, Wall Street professionals and the business media is that they should always have strong opinions about where the market is heading and bet heavily on that belief. Unfortunately, that is a lousy approach to the stock market and likely to cause much pain for the average investor. There are many times -- in fact, maybe even most of the time -- when the best approach is to simply acknowledge that you don't know what is going to happen. It is fine to have a working thesis or to lean in a certain direction, but always being certain about market timing is just downright foolish.

    Unless you are being sensationalistic or seeking publicity, there really is no great benefit to always having a strong opinion about where the market is headed. In fact, being uncertain and keeping an open mind is more beneficial in many cases because it gives you the flexibility to react as events unfold. When you have strong opinions, especially when you have acted on them, you often find yourself not only financially committed to a certain outcome but also mentally and psychologically committed.

    Many of the permabulls and bears are good examples of this. They make these big bold calls and are so invested in them both psychologically and financially that they can't easily change their minds without feeling and looking quite silly. When guys like Joe Battaglia, Art Hogan or Bill Fleckenstien suddenly change their usual bullish or bearish posture, they undermine all the things they have been saying for many, many years and appear to be admitting that all they have said previously is meaningless.

    And that brings us to today. We are at a juncture now where strong conviction about where the market is headed is unlikely to serve us well. We have a good supply of both positives and negatives, and events like the appearance of Ben Bernanke before Congress this week or further developments in Iran could easily swing us one way or the other.

    Not only are unfolding events uncertain, but the technical picture is also very mixed. The Nasdaq and S&P 500 are both at support levels from which they can more easily slip into the abyss or spring forward back toward recent highs. One of the major flashing caution signs this past week was the relative weakness in high-beta momentum stocks such as those that make up the IBD 100 ranking. That list of stocks was down over 4% this past week and small-caps, which have been the big winner so far in 2006, also showed relative weakness.

    On the other hand, there seems to be increased nervousness about the market, which was reflected in the intraday volatility we saw on Thursday and Friday. On both days we had big intraday turns which keep both bulls and bears uncomfortable. My general feeling is that the market isn't as bad as many seem to think; however, I'm not so committed to that opinion financially or emotionally that I won't change my mind as trading unfolds. It can feel good to be confident and certain, but it can also cost you big.

    We have a weak start to the day. Barron's did one of its patented hack jobs, this time on Google (GOOG:Nasdaq), and then the WSJ threw some fuel on the fire with comments about how much of Google's income is due to interest on cash. Commodity-related stocks are weak again as copper prices fall sharply, however oil is holding steady. A weak start today is probably more bullish than a strong one since it washes out some nervous bulls, but we'll see how things develop from there.

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