The Danger of Calling Stock Market Tops

This column originally appeared on Real Money on March 9 at 12:34 p.m. ET.

NEW YORK ( Real Money) -- The sell-the-news crowd is very anxious for some action, but so far the market is holding up extremely well. In fact, the folks who are trying to pick a top are turning into short-squeeze fodder and are helping to keep a bid under this market.

The temptation to try to call a market top is very understandable. The idea of loading up on shorts at the exact turning point is what many people think trading is all about. Unfortunately for most people, that is not the way to make money in the market.

There are folks like Doug Kass who do well at calling market turns, but what many don't realize is that a big part of that strategy is effective money management. If you are going to try to play turning points you need to make sure you are averaging in correctly and using stops in case your timing is off.

It has always been my belief that most market players would be better off if they spent less time trying to time market turns and more time sticking with momentum in good stocks. Managing a trade in a stock trending upwards is much easier than to try to precisely time the moment the market reverses.

Just because you don't focus on calling market tops doesn't mean you turn into a long-term, buy-and-hold investor. What it does mean is that you don't constantly short into strength on the hope that this time you will finally be right about a reversal. As markets become more extended, astute traders will cut their exposure. But they respect the fact that more often than not stocks will continue to run higher than they think is reasonable.

Personally, I'd love to try to nail a market turn here. It would be very rewarding to catch that sort of turn, but I see nothing in the action to suggest that a sudden reversal is likely. Many are obviously hoping for that to occur, but that doesn't support the trade.

I'm not fighting the strength, but I have been a net seller as many of the positions I'm holding are up on declining volume into resistance. I don't expect them to suddenly collapse, but I'm happy to lock in some gains and wait for better setups to develop.
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.

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