You can feel it in the air this time of year—investors’ collective desire for the market to go up. Portfolio managers, including me, are pressing for some 11th hour gains to boost lower-than-average performance this year. Individual investors, too, are looking to make up at least a little ground in this nearly profit-less year. But isn't it amazing how the market will make stocks look just good enough to get us back in? In the last few weeks, several dozen stocks like Google (GOOG), International Business Machines (IBM), Concho Resources (CXO), and Intuitive Surgical, Inc. (ISRG) have been tightening up on their weekly charts, and they are acting better. Each of these stocks may present one good reason to go long, but the current environment offers investors 100 reasons not to.


Here’s the harsh reality: The subtle effect of this year-end focus is not enough to quiet months of volatility and change the character of a market highly tuned to news of the day. 


When you consider the heap of good earnings reports, we should be off to the races. Not the case. Many stocks, like Steven Madden Limited (SHOO) or Athenahealth, Inc. (ATHN) shown above, got hit with a reversal after breaking out on good earnings reports. This action indicates that this weak market environment will not even let the strongest stocks go up. We know from studying past market cycles that breakouts to new high ground rarely work in bear markets. That means gains from the one stock that holds its ground easily get consumed by the stocks that fail.  


We need to fight that year-end pressure to get points on the scoreboard. Remember that not going backwards is our first priority. My advice is to take a hard look at any losses. Remember, if an individual investor’s portfolio is down 33%, a 50% gain is needed JUST TO GET EVEN. In this market, it’s too easy to lose and too hard to make up. And the last thing we want is to start the New Year deep in the hole. So for the past six weeks, I have been writing about how to handle this market—probably at least partly to remind myself also:  Invest small (or stay small), keep all losses extra tight (5% maximum), and beware of breakout reversals. And remember, as a friend of mine recently noted, Cash is a Position.


Best Returns,


Scott O’Neil

President, MarketSmith Incorporated

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