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Can the Bears Gain a Toehold?

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Typically, large one-day declines from 52-week highs are followed by a swift, but mild, rebound, after which we roll back over and undergo a more sustained correction. Of course, this market doesn't know "typical."

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After one of the worst days of selling that this market has encountered in quite some time (the last time the S&P 500 lost more than 2% in one day was back on August 11), market players are busy scratching their heads, trying to figure out where we're headed from here. Typically, large one-day declines from fresh 52- week highs are followed by a swift, but mild, rebound, after which we roll back over and undergo a more sustained correction.

Of course, there hasn't been a lot of "typical" when it comes to this market. There are plenty of theories out there regarding the drivers behind this highly unusual action we've encountered over the past few months, but the bottom line is that, if you aren't surprised should this market make it back to fresh highs in short order, then you haven't been paying attention lately.

Indeed, not having full faith in the troops' ability to quickly jump back in with both feet and squeeze the bejeepers out of anyone foolish enough to try and catch some action on the short-side has resulted in some very poor results. Adopting a cautious approach and waiting to see how the action develops before wading back into the water has left more traders scrambling to find ways to play catch-up than I care to count.

Regardless, there are a few aspects to the current situation that demand our attention. Unlike Egypt, Libya is a meaningful oil exporter, and there are some very real worries that the unrest in that corner of the globe could spill over into other, more significant, oil-exporting countries.

Meanwhile, the action that this market has experienced lately has left us exceedingly extended to the upside. Jeff Saut had a great article yesterday about how he's been booking some gains recently, not because he's bearish, but because it's been the prudent thing to do. (See Have Investors Been Too Cautious? for more.) I suspect that, if we don't bounce back as quickly, then a lot of other folks will start thinking really hard about following suit.

Unfortunately, all we can do at this point is wait to see how things play out. I am hopeful that we'll see a period of consolidation that will help create some better opportunities down the road and separate the wheat from the chafe. I'm starting to hone my watchlists, but my main objective right now is making sure my accounts stay near highs.

That means taking stops where appropriate and thinking hard about booking at least partial gains in those names that are exhibiting some fortuitous relative strength. I might find myself once again frustrated at not taking a leap of faith, but that is a risk I am willing to take given the broader conditions I outlined above.


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No positions in stocks mentioned.
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