How To Call The Market Top

(TheStreet) The primary topic of much market commentary is predicting when the market will undergo a major change in trend. The discussion is typically about macro-economics, political issues, valuations, technical conditions and dozens of other topics that we see in the headlines every day. There is all manner of complexities and theories designed to predict what is going to happen.

Unfortunately, the pundits don't do a very good job of predicting. They are great at making very astute and logical arguments but they are never able to nail the timing. Most are consistently early in their calls for a market correction and often by such a magnitude that the opportunity cost outweighs any value their predictions may hold.

If we can't trust the 'experts' to give us good advice about a market turn then who do we trust? The answer is the stocks that we own. There is no better market indicator than the stocks that you own. When they start to act poorly it is time to sell and when they are acting well it is time to buy more. Simply look at your profit and loss statement and when you are losing money then it is time to take some action.

If you apply this approach rigorously then you don't need to worry about all these complex big-picture arguments. When you sell stocks that are slipping, you will automatically raise your cash levels. The weaker they are the more you sell and the more insulated you are from poor market action.

Like most things in the market, the theory is much easier than the application. This approach doesn't work if you find reasons to not sell stocks that are acting poorly. That is by far the biggest problem that most market participants face. They simply don't want to give up on a precious stock that they think is going through a temporary bout of weakness.

As is so often the case with effective trading the key is to have a plan and the discipline to stick with it. If you sell stocks that are weak and break support and only buy stocks with 'good' technical patterns then you will be positioned more defensively as the stock market goes through a corrective cycle. Avoiding major losses is the key to all market outperformance.

It is always possible to formulate a very compelling bearish argument but the only timing that matters depends on price action. If you let your stocks be your main indicator of market health then you don't have to worry about those complex macro arguments.

The biggest drawback to this approach is that market players will sell but then fail to rebuy when technical conditions turn back up. 'I never got back in' is one of the most common laments when a trader takes an active approach to manage their positions. The only way to deal with that is to have a set plan and make sure you execute. When you sell make sure you have a solid plan for buying back those shares should conditions change.

I have no idea what this market is going to do next and none of the experts do either, however, I am very confident that I can manage my positions tightly and keep my accounts fairly close to their highs no matter what may happen. I have no fear of a major market correction. In fact, it would likely create some great opportunities. That sell button works very well and is easy to undo.

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