February 10, 2013
Weekly Market Outlook
By Geoff Bysshe
Of course a market correction is inevitable. The market can't go up forever. Everyone knows that. Still market tops always seem to "surprise" traders and investors. Yet, you probably learned in kindergarten how to avoid getting caught at the top. Remember the game of musical chairs? You needed to go with the flow, but listen closely to the music.
Unfortunately, for most traders "going with the flow" without listening to the market is all too often the real reason why a market's correction is not understood and accepted by most traders until it is too late to have sold at the top. This leaves most traders surprised and wondering why they didn't see the top coming. This is the process that "Mr. Market" has perfected in order to hurt as many traders as possible at each turning point.
The irony in this is that the market often does warn traders of which financial or economic headwinds might cause the next "surprise" correction well in advance of the significant market declines. But tops happen when too many traders aren't listening. And just like that game you learned in kindergarten, Musical Chairs, the traders who aren't listening closely enough to the market are the ones left standing with losses when the bull market's music stops.
I think if you polled traders in the U.S. you would find that most would agree that the financial problems in Europe are not over. But if your follow up question asked if Europe's problems were still our problem, the majority would likely answer "no". I'll admit that prior to this week I would not have ranked Europe's problems as high on my list of concerns for our market. But I've changed my mind.
The market has enjoyed a run up thus far this year that is literally worthy of the record books. In doing so, traders have focused on positive earnings reports and brushed off mediocre economic data as good enough to justify the move higher. Who am I to argue? The market knows best. However, the market also warns us of its strengths and weaknesses. And this week the market had its worst down day of the year. I'd bet that most traders have already forgotten about this day because the following days easily erased the losses and moved even higher.
Listen to the market. The forgotten down day (the biggest down day of the year) was a result of fears over Europe's financial condition. Europe's problems are not over, and if you believe that the market knows best, then there is still a risk that Europe may create problems for our markets.
I'm not interested in drumming up fear, screaming "fire", or predicting the inevitable correction will be brought on by Europe, but when the market leaves clues like this, I go looking for ways to be more attentive to important market weaknesses. This way, I can continue to follow the flow of the market but should Europe begin to develop into a "surprise" I will have seen it coming, and avoid being that last trader standing in the market's game of musical chairs.
This week’s market Outlook video will give you one of the ways I'll be measuring the risk that inevitable upcoming down days will surprisingly develop into the next inevitable market correction.
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