Trade What You See

Trade what you see, not what you believe.
-- Kevin N. Marder

The great challenge of the stock market is dealing with action that is inconsistent with what we believe. Unfortunately, most investors tend to believe that the proper way to invest is to formulate some sort of grand thesis about what the market should do and then wait for it to happen.

This approach to investing really isn't that surprising given what we see in the media day in and day out. Financial journalism is dominated by pontificating pundits who can't wait to share with us how things will unfold over the next several years.

The problem with this sort of big-picture thinking is that the timing is never precise. Virtually all predictions made by pundits will eventually be proved correct if we wait long enough, but we will forgo some tremendous opportunities in the interim. Back in the late 1990s, a number of folks predicted that the market would eventually fall, but if you listened to them and acted prematurely you would have missed out on one of the most profitable runs in history in 1999-2000.

I'm not saying that we should avoid formulating a market thesis, just that we need to focus on timing. Too many market pundits are forgiven their poor timing. Just because they present a controversial view, the media will overlook the fact that investors who followed them would have been buried.

Timing is everything in the market. Being right is cold comfort if you have suffered severe losses while waiting for the market to do what you think it would. It is imperative that you trade what you see in front of you even it if is at odds with what you believe.

As I've postulated here numerous times lately, I believe that the market is vulnerable to suffering another downleg. I don't believe the "worst is over" rally is going to continue unabated.

Yesterday the market didn't much care what I thought and managed to produce a big gain. That hasn't changed my thinking about where things are eventually headed, but rather than fight the positive market action, I adapted. I took stops on some index longs and put on some long-side trades.

One of the other problems with big-picture thinking is that it makes it very easy to overlook some of the pockets of strength in the market. The stock market is not a monolithic beast. There are always some sectors that are moving contrary to the broad market. Recently you could have done extremely well trading groups like oil, agriculture, steel and solar energy, which have essentially ignored the major indices.

Yes, we want to consider the larger picture, but we don't want to be so dogmatic that we ignore the many opportunities that arise each day. I still think the market is going to run into some problems, but until it actually does I'm going to focus on the price action and trade what is in front of me.

We have a little weakness to start the day as Wal-Mart (WMT - commentary - Cramer's Take) pulls back after issuing an in-line report and slightly soft guidance.

No positions.

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.