Sunday, July 1, 2007

Buying opportunity or bear market?

I want to point out something that probably everybody knows but that very few can act on. Every pullback when it is happening looks like a selling opportunity and every rally when it is happening looks like a buying opportunity. That is just the way the human mind and emotions are programed to work. We seek positive reinforcement. Take a look at the charts from every correction so far in this bull and tell me at the bottom if you weren't inclined to sell instead of buy. My guess is about 90% of you wanted to sell aggressively at market bottoms. It is very hard to control our emotions and do the opposite of what the mind wants us to do. So how do we know if a pullback is just a pullback and should be bought or if it's the start of a bear market and should be sold. Well the only reliable method I've found is to watch the COT reports to find out what the smart money is doing. If they are buying at these bottoms the odds greatly favor that it is a normal correction in a bull market. If they are selling heavily like they were in 2000-2003 then it's probably a bear market.