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Market Starts New Year With a Bang, but Investors Should Avoid Undisciplined Trades

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Chasing a big Monday morning gap, regardless of where we are in the calendar, isn't the sort of disciplined approach that keeps investors in the game for the long haul.

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We're kicking off the new trading year today, and that gives us a good opportunity to reflect on some changes that we'd like to make. My biggest mistake last year was not respecting the fact that the pricing action was strong and trusting my much-repeated mantra that trends tend to last far longer than may seem reasonable. I write all the time about not being anticipatory, but it isn't always easy following your own advice, and my goal this year is to work exactly on that.

There were a myriad of reasons for not "trusting" the action, with the largest being the difficulty many had reconciling how stocks were acting with what was happening out in the "real world." I personally know several people who have been out of work for a long time and continue to have difficulty finding a job, and that list continues to grow. Meanwhile, housing remains a shambles, and there has yet to be any indication of any substantial improvement in that very important sector of the economy.

The simple fact, however, is that many of us would have been much better off by simply paying attention to the charts, which reflected little of the concern that has been a constant presence in our day-to-day experiences.

Of course, I have no idea whatsoever what the next 12 months will hold, and anyone who tells you different is just guessing. I do believe, though, that (despite what the government is telling us) inflation is going to be a factor, and that the tremendous amount of liquidity that the Fed has pumped into the system will be less of a driving force. That will demand a more active approach, and that will be my main focus as the year develops.

Regardless of whether this market is up or down 361 days from now is irrelevant. What is relevant is that we're ready to react to whatever the market gods decide to throw our way, and that there will be plenty of opportunities for individual investors who keep their head in the game, adapt to conditions as they change, and avoid the temptation to project their own biases on the action.

We're kicking off the new year today with a bang. Over the past several days, the indices have been able to work off some of their overbought readings, but remain extended to the upside. Probably the most concerning aspect to the action recently has been the growing number of market-leading stocks that have started to take some technical damage. Names like Netflix (NFLX), Baidu (BIDU), and Chipotle Mexican Grill (CMG) have come under distribution and are now under their respective 50-day moving averages.

Meanwhile, we've had a real surge of speculative action in so-called "junk stocks," and when you combine those two factors, you have a compelling argument to be more than a little wary about chasing a market that (as of today's open) is again quite stretched to the upside.

My plan, then, is to take it slow and watch how things develop. There are plenty of folks in the media this morning who are downright giddy over this positive start, but don't let that force you into making undisciplined trades. Chasing a big Monday morning gap, regardless of where we are in the calendar, isn't the sort of disciplined approach that keeps investors in the game for the long haul.

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No positions in stocks mentioned.
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