Tuesday, November 10, 2009

State of the Market - 11/10/09

A little different post today, as the market did absolutely nothing overall and I still don't have a good feel for where we go from here, at least not any better of a feel than I had yesterday. I actually have spent most of the time that I spend thinking about the market (which conicidentally is becoming ever smaller as this year goes on) wondering why the market is doing what it is doing this year. I've been trying to figure out a reason for all of the bizarre behavior seen this year and why most things that have worked historically just haven't worked well this year. So I came up with this step by step process that might explain some of the behavior we've seen this year. This is the best I could do and feel free to share you comments.

A Step by Step Guide for Market Behavior in 2009

Step One - Flood the market with (virtually) free money and low interest rates that make investing in anything other than the stock market foolish. This pushes the market higher off of a bottom even though it lacks any fundamentals to back it up.

Step Two - Get the market to overbought levels on less than stellar volume(due to no real interest from buyers other than those with the free money). This pulls in bears that realize there are no fundamentals to back prices up and starts them on the path to shorting the market heavily.

Step Three - Have the big brokerage house (i.e. Goldman) come in as a buyer with that (virtually) free money and push stock prices back up just when it looks like things will break and the negative factors present will come into play. Remember 2008 virtually eliminated competition on Wall Street as Lehman and Bear Stearns are no more. Goldman is no doubt the top dog, perhaps the only dog. Basically let them roast the bears that are heavily short based on the merits of the market.

Step Four - As step three occurs, there begins a natural short squeeze that becomes more powerful as it goes as more people jump on the negative bandwagon based on the merits or lack thereof of the market. This short squeeze pushes the markets to new highs regardless of fundamentals and technicals.

Wash, rinse and repeat. As this process occurs over and over, it gets to be a self-fulfilling phenomenon and a more powerful one each time it happens. As the technicals and fundamentals get worse and as the market keeps moving higher regardless, more people recognize these factors and think "well, these negatives have to matter at some point. I will start shorting." As soon as that happens, the (virtually) free money comes back into play and another short squeeze is ignited.

I don't know how long this can keep going on and how long this market can be out of whack with its fundamentals and technicals, but as of now, it doesn't look like it will stop soon. What this may lead to is indeed a blow-off top where finally everyone that is using common sense and historical tendencies (i.e. the IBD style system) up to this point to prematurely short the market throws their hands up and says, "that's it, I'm done, this market is never going down, so I am buying." Then of course the market does go down on all of its merits. Or maybe it doesn't because the free money doesn't look like it will be ending soon. Either way, the historical strategies that have worked in the past don't seem to be working in this market and traders need to adjust accordingly.

Good luck Wednesday - I have the day off work and my wife and I will be taking our two boys to the local Children's Museum, so I won't be trading. That is probably a good thing. Take care.

1 comment:

Anonymous said...

Well, most likely this is myopic but here's how it appears to me - it's clear we don't plan on curtailing spending so when confronted with not being able to meet our obligations - we either flat out default on our debts or debase our currency, same difference but perhaps one is less obvious for a while. So we print, and like you said, all these dollars flow into assets which, ultimately, reflect the dollar devaluation via higher prices. We are not recovering, just more dollars chasing the same shit. It'll work for a while, until confidence in the dollar becomes too stretched. Then they'll have to take their foot off the gas (to the printing press), jawbone about fiscal restraint let dollar strengthen for a while, then ratchet back up, etc - my guess is they will repeat until they can't. By then, Elvis will have left the building. It's like putting frogs in a pot of cold water and slowly turning up the heat.

- bullethead