I can’t believe it’s almost the end of the first quarter of 2012. And where are we? The markets have been showing some slight signs of strength. We have seen an improvement in employment (but an anemic one), the housing industry, and the manufacturing sector, but are they enough to bring us back to the boom times, or are they just signs of another buildup in volatility? At the moment, I am leaning toward the latter.
Meanwhile, fundamentals are still weak not just in the US but globally. We continue to see government intervention all over the world, we are still faced with rising oil prices, the US trade deficit is still very large, and let us not forget (how could we?) the economic slowdown in Europe, Asia, and Latin America. Not to mention there are so many factors that could cause tremendous amount of uncertainties — the 2012 US Presidential elections, geopolitical risk in countries such as Iran and North Korea, and the ever-so-indecisive market that can violently and unexpectedly reverse its path on any given day. With all this turmoil, it should come as no surprise that market participants are exercising a tremendous amount of caution before dipping their toes into the markets.
With this gloomy picture, I don’t expect 2012 to show any explosive moves to the upside. Although we have seen the markets moving up since November 2011, I think it has moved a little too much, too fast, and that causes some concern. I would still be cautious about holding any positions for too long. If things start to look too toppy to you, then by all means, you may want to consider closing all your long positions. Shift your focus to opening short positions until you are relatively confident that the market will reverse. This is a great time to try to get a feel for market momentum. Try to identify signs that indicate that the market has reached an extreme. Are there any patterns that you can see? Are there any relationships between price and volume that have become clear to you? Do you see any correlation between economic releases and price action?
And if something does pop out at you, once you think you’ve figured it all out, it’s inevitable — the market will throw you a curve ball. It’ll leave you as confused as you ever were. But that’s the reality, and you have to love the market for all the surprises it throws at you.
You can never figure out the market. If you find yourself frustrated, you have to learn to accept it instead of trying to fight it. It’ll make a world of difference to your trading.
Jayanthi Gopalakrishnan, Editor