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Confessions of a Pessimist


Earlier this morning I wrote that you could call me a pessimist. Let me explain this a bit further, because it's certainly not a permanent mindset. It's simply a function of whether the indicators I follow have me positioned with a bullish or bearish bias.

With the NYSE Bullish Percent positive I have no choice but to take a bullish approach to the market. As I wrote this morning, two of the short-term indicators I follow have now turned down, but the intermediate and long-term indicators remain bullish. This dictates that I maintain an overall bullish posture, even while recognizing that the short-term picture is weakening.

Of course, without a crystal ball I have no idea whether the short-term weakness will spill over to the long-term. Sometimes a pullback is just a pullback, Dr. Freud. The best I can do is look for signs that a pullback is creating technical damage. So, that's what I do. I look for the holes in the silver lining.

As a function of my discipline, when I'm on "offense" is precisely the time I want to focus my analysis on what could go wrong, rather than what could go right. This is especially true at elevated risk levels such as we have now. Conversely, when my indicators are bearish and at low levels I am looking for things to go right, not looking for signs that may reinforce my defensive-minded posture.

This may seem overly simplistic and backwards, because it is. As the NYSE Bullish Percent moves higher the more bearish I become because, virtually by definition, high levels for this indicator suggest that the availability of demand to continue to drive the market higher is diminishing.

The opposite is true when this indicator is at low levels and bearish. That was back in March and early April with war in the headlines, the dollar collapsing, and the clouds seemingly dark and scary. In technical analysis signs of things "going right" include technical breakouts and higher highs. Signs of things "going wrong" include technical breakdowns and lower lows.

Because my posture is bullish when my indicators are bullish the "going right" part will take care of itself. It's the "going wrong" part that will require a change and possibly some action on my part. And that's what I want to prepare for.
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