February 24th, 2008

Market Crash Call: A Clarification

An apology is in order. I may have left a mistaken impression in my post of February 15 where I said that there was a high probability of the market resuming its slide (I think I used some hyperbole and claimed that there were “10-20 days to a stock market crash”).

In no way was I saying that my Market Timing Indicator (MTI) was predicting an crash nor was I saying that if the MTI hit a certain level it would precipitate a crash. The MTI is a tool, like a thermometer or a thermostat, that measures the “temperature” of market momentum. It indicates at any point in time the direction and strength of the momentum prevailing at the time.

As a matter of fact, if the MTI regulates anything it’s the investors emotions. Rather than emotionally reacting to every bit of positive news (buying when the market has been trending down) or negative news (selling when the market is making new highs daily), the MTI gives the individual investor a benchmark that helps measure the emotions all investors as reflected in the markets momentum.

The MTI is updated daily and recalculated based on the day’s action of the S&P 500 Index. My reading indicates that there’s a high probability, based on recent trends, that the MTI will soon morph into a configuration that frequently in the past more than 40 years has coincided with major market corrections.

There’s no cause and effect implied. There is only probabilities based on past experience under similar momentum situations. In the past, when the S&P-500 Index has declined as rapidly and as steeply as it has over the past couple of months, it has been unable to make a V-shaped recovery or form a short base from which the market resumes its advance. Sharp, rapid declines have usually led only to more declines.

Will it be the same this time? I don’t know and can’t predict. But you can be certain that this is not the time to “pick up bargains”. There’ll be plenty of time when the market’s put in an absolute bottom.

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