Technicals Won't Be in Charge for Long

The cyclical tug of war between bulls and bears has temporarily been replaced by a different kind of war. This other war is more short term -- it's the tug of war between the technicals and the fundamentals.

Market technicians have had complete control since the new year began. This explains why the market is acting completely independent of the news. When these guys have control it can be maddening. No matter how good or bad the news is, the market refuses to react. It's like a boat out at sea that only follows GPS navigation while ignoring the objects on the radar. This strategy doesn't work in the long run for obvious reasons.

If you find yourself feeling overly frustrated when the market doesn't rally on good news or when the market doesn't go down on bad news, it's usually because the technical traders are in control of the action. There are a few rules to follow when these circumstances prevail.

1. Don't change long-term assumptions.

Bear with me as I switch from a boating analogy to basketball. The market action of January and February would have you believe that each time you make a three-point shot it's actually worth zero points. Fundamental investors know they have drained three-pointer after three-pointer but it is disheartening to see no impact on the scoreboard. Does this mean we should abandon three-point shooters (equities) and load up on low-post scorers (bonds)?

We want low-post scoring when the game gets rough (worsening economic growth) and we want three-point shooting when it's running time (improving economic growth). Just because the market isn't giving me credit for my three-point shots in January and February is it time to abandon the strategy for the rest of the year? That would be foolish. The ref's (technical traders) can only take away the points for so long. Eventually the better team (fundamental direction of the market) will win the game.