Time To Refresh Your View of the Markets?

http://www.thebullbear.com/profiles/blogs/time-to-refresh-your-view-of


(The following is the Introduction to the latest BullBear Market Report for BullBear Traders members)

In the last BullBear Market Report, I called for a significant correction to begin and announced that I had closed all long positions and initiated a short position. My current analysis suggests that that continues to be the correct view of the market, but that the topping process is still in progress and that substantial downside may yet be a few weeks away. I'm back to 100% cash and awaiting a good shorting opportunity. I've changed my market stance from Bullish on all time frames to long and intermediate term Neutral and short term Bullish.
It's important for readers to note that I am not a permabear. In fact just a month ago I was 100% long and firmly bullish in my outlook. But I think it's crucial for traders to practice non-attachment to views. Rigid self identification as "Bullish" or "Bearish" is a major hindrance for any market participant. It's important to be able to let go of an established view when the market reality changes. Zen master Thich Nhat Hanh says:
"We must not be attached to a view or a doctrine, even a Buddhist one... The Buddha said that if in a certain moment or place you adopt something as the absolute truth and you attach to that…then you will no longer have any chance to reach the truth. Even when the truth comes and knocks on your door, and asks you to open the door, you won't recognize it. So you must not be too attached to dogma - to what you believe, and to what you perceive." Thich Nhat Hanh

That doesn't mean we should throw out an established view casually either. But views should be constantly tested and probed for weaknesses using objective criteria and analysis. During solid market trends, such probing finds confirmation of the view. But during the process of a market trend change, eventually probing reveals weaknesses and soft spots which over time develop into a reversal. It's very possible we are already well into that process now and that a trend change is looming.
Markets are fundamentally driven by the dynamic between buyers and sellers, supply and demand. That includes the capital markets. So ultimately it is a game based on liquidity. Whether liquidity flows into a market depends upon the available pool of capital as well as the psychological willingness of participants to risk that capital in the given market. When the pool has run low and most participants are already in the pool, the trade is crowded and it will inevitably reverse. The extent and duration of the reversal depends on depth of the imbalance. Eventually the pool will become relatively full and will look enticing and market participants will start to dip their toes in the water once again, eventually...