Closer to Reversing

I wrote last week:

This pace will surely slow down. . . . I think we’re in for a little more upside, but that we’ll be heading lower in the medium term.

Since then, we have indeed continued moving higher as expected. The danger of expecting a correction on the other side of a rising market in the short term is that the buoyant short term creates complacency.

We’re seeing that now. Sentiment polls indicate a falling level of skepticism that’s necessary before a sell-off can begin. When people are skeptical, they hold back their money. That leaves cash on reserve for investing, which props up prices on pullbacks and good news both, the former for bargain hunters and the latter for momentum chasers. A healthy level of skepticism is necessary to keep a bull market going.

People have been skeptical all winter. When they missed the most recent rally, many held back for a while expecting a correction. It didn’t come, so they watched the market rise without them. Some die-hard bears will not get onboard until a massive sell-off to the tune of -50% unfolds, but the majority of skeptics are letting down their defenses and buying dips where they can.

Just about the time people believe in the rally and have all their money in the market to participate, the influx of cash will diminish, and we’ll see a correction that re-stocks cash reserves as investors sell on the way down.

So, do not let the buoyant short term lull you into complacency. The medium term looks ripe for bargains and I suggest looking toward it and managing your capital wisely to take advantage of it when it comes. That wise management should include:

  • Setting stops under some of your profitable positions that have experienced a strong run higher. Ratchet those stops up as the stocks continue rising. One day, they’ll settle back and you’ll lock in your profits, and be glad you did so.
  • Holding cash that you’re looking to put to work. Patience will prevail in the medium term.
  • Maintaining your stocks-to-watch worksheet so that you’re prepared when the sale begins.

These simple steps are a good way to play the late stages of a rally because they allow winners to keep winning while the wind is at their backs, they keep cash ready for opportunities, and they flag where those opportunities are likely to occur.

Remember, opportunity favors the prepared investor, so be prepared.

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