3 Reasons to Ditch Your Bear Suit

Don’t give up on stocks just yet. In this market, the early bear gets squeezed.

It’s just plain dangerous to bet against a low-volume drop like we’re seeing right now. Heck, we’re not even officially experiencing a correction. Or a meaningful dip.  But that hasn’t stopped the crash brigade from declaring once again that this is the beginning of the end for stocks…

“Suddenly, everyone is talking about this being a correction. I would say that at the current moment, we are just barely in a dip but possibly headed toward a correction,” says Josh Brown of The Reformed Broker. “With a market pause that is not yet even a 5% dip – let alone a 10%+ correction – people (myself included) have been jumping the gun in trotting out the C-word so early.”

He’s not alone.

These low-volume drops have investors running in circles. There are no bulls in sight. Everyone is expecting the worst…

I’m not saying you should completely ignore this month’s market action.  But there’s no reason to sell everything and set yourself on fire out on the front lawn…

Here are three reasons you shouldn’t jump headfirst into the bear market camp just yet:

1. It’s August

Trading volume is almost non-existent right now. And for the past several years, we’ve seen quite a few wild price swings in August that didn’t stick. It’s entirely possible that buyers kick it back into gear after Labor Day…

2. The Taper is coming?

Every dip in this market since the November 2012 bottom has coincided with a big policy fear. First it was the Fiscal Cliff. Then it was Sequestration. Now it’s the Taper. The safe bet so far is that none of it really matters as much as people think it does.

3. Hysteria

Investors should welcome a dip. Dips are opportunity. But that’s not the vibe I’m getting as the market creeps lower this month.

Bespoke Investment Group reports that bullish sentiment among newsletter writers has declined to its lowest levels since late June. This piece of data is usually a great contrarian indicator.

Also, don’t ignore pockets of strength in this market. While the Dow coughed up its gains yesterday and closed in the red, the Russell 2000 finished the trading day up more than 1.5%.

It’s never a good idea to trade on your fears. Keep a level head and let price guide your decisions. The dog days of summer are almost behind us…

Rude Trends

“I’m really sad that you are now recommending gold miners,” writes a concerned reader. “You need to go back over the past month or more and look at all your comments on gold and the precious metals sector, and also the main stock indexes.”

I like where this is going. The floor is yours…

“Thankfully, I ignored your ‘advice’ and stayed out of the stock markets, which have continued to go down, and invested heavily on July 3rd in Gold AND Silver miners,” he claims. “My overall portfolio in up over 30% in just over a month, and some of my miners are up over 50%. Shame that many of your readers will have taken your advice and are nursing stock losses and missed out on nice gains in the precious metals sector.”

That’s cute. The broad market’s a little more than 3% off its highs and the naysayers are already coming out of the woodwork…

First, congrats on your gains. You got in just a few ticks off the bottom. I can’t fault you for a solid trade.

And you’re right. It’s a good thing you’ve ignored me. I’ve only been pounding the table to buy stocks since late last year when the S&P was well below 1,400. Then, I followed up on that by calling the gold crash back in the spring. There’s no way any of those ideas panned out.

As far as missing out on mining gains—I think PRO readers would disagree. They’ve had the chance to book double-digit gains on precious metals plays on multiple occasions this summer (we’ve played upside and downside moves successfully). In fact, we took a trade on a silver miner just last week.

So much for missing out…

Regards,

Greg Guenthner
for The Rude Awakening

The Daily Reckoning