The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- There are simple philosophies in trading that can help any market observer better gauge the financial markets. One such philosophy, exercise, theory or whatever other name you would like to give it is what I like to call "the law of avoidance."
The law of avoidance is simple: If you have a worst-case scenario laid out for a particular stock or the general market and it does not come to pass, that stock or the market as a whole is stronger than indicated and should be bought.
For example: Say we own a company that has reported terrible earnings -- a miss on the top and bottom line estimates. Future guidance stinks. Pessimism reigns between the report and stock opening for trading the next day. You are expecting the stock to sink at least 10% on the open.
Lo and behold, the stock opens down 3% and simply hovers around that area for the first hour of trading. By the end of the day it closes flat.
This is the law of avoidance. The stock has avoided the worst-case scenario. In doing so, it has exhibited behavior that would indicate that the price action in the company is a lot stronger than you think.
It doesn't matter why. It's not supposed to make sense. Don't allow your brain, combined with a good deal of intellectual arrogance, to get in the way of listening to what the market has to say. In the case of the example listed above, the stock avoided the worst-case scenario, exhibiting behavior that indicated strength. That's all the information you need.
The law of avoidance came into play over the past few months with the performance of the general market. My normal scenario for this market had it pulling back between 5% to 10% by midyear. As of today we are about 2.5% off the intraday high posted for the S&P in May. Never mind the fact that we weren't even supposed to be making a high on the S&P until the second half of the year.
The law of avoidance for the S&P saw the average avoid its worst-case scenario with ease -- a sign of strength. The S&P made a high during a period it was supposed to be consolidating, another sign there is a consistent underlying bid to the market. This is the market speaking. All that needs to be done is an opening of one's ears.
I want to be 100% invested here. I don't use leverage, so that's as much as I'll get up to. The sideways correction phase will come to an end sooner rather than later and I expect the upside to be substantial. Position yourselves accordingly.
Ali Meshkati is founder of Zenpenny.com, a website focused on investing in restructurings and special situations in microcap and small-cap stocks. Prior to Zenpenny, he managed Trillian Capital Partners LP, a top-ranked macro hedge fund. He has been trading the financial markets since 1994, working as an adviser to both individual clients, as well as an institutional trader with Bank of America. He can be reached at firstname.lastname@example.org.