August 2nd, 2010
There’s so much conflicting and contradictory information that investors don’t know whether to sell or to back up the truck and load up? For example, In a recent Seeking Alpha blog article entitled “Warning Signs Suggest Market Headed for Another Collapse“, the author compared the head-and-shoulders formation in 2008 just before the Financial Crises Crash of 2008-09 to one he sees in the recent market action (something I wrote here often about). He concludes:
“a head & shoulders formation is arguably the most bearish technical formation in the books. The time, breadth and size of this head & shoulders is exactly the same as what we saw in early 2008 just before entering the biggest bear market in modern history. The neckline on this formation sits at around 1040 on the S&P 500. A substantial break below 1,000, the low of this current correction, could spell disaster for the broader markets ….. The long-term prospects of the market are completely in question until we see a rally above 1,220 on convincing volume.”
A major fallacy I see in his comparison is that it totally ignores market life cycle and investor psychology. Remember the two charts I frequently inserted last year depicting the various psychological phases the market goes through during its life cycle?
I look at these schematics and ask myself “In what sort of frame of mind are most of “talking heads” today as they give their views, concerns, strategies or advice?” Are they euphoric about stocks today? Are they thrilled with the opportunities they see in the market today? Are they filled with optimism and excitement at the market’s prospects?
If they are they would be tell tale signs that the market is approaching a top, on the verge of a collapse. This is how the big money guys spin their spiel so they convince the little guys to get into the market so they can distribute to them stock they accumulated a long time ago at much lower prices.
I just don’t see that happening and I don’t feel immersed in that sort of psychological atmosphere. Rather than excitement, thrill or euphoria, I sense more of the same sort of anxiety, depression, hope and even despondency resulting from continued uncertainty and fear that is associated more with bottoms than with tops.
We all know that the market hasn’t done anything for almost a year (actually, since last August or 11 months). How flat has it been? Here are the changes from the end of each of those months to last Friday’s close. The table shows the sort of percentage change investors would have realized had they invested at the end of each month and held through Friday’s close:
That sort of performance sure doesn’t look like a top to me. There hasn’t been a blow-out rise, a throwing of caution to the wind. Instead, it’s looked like a consolidation (or base, depending on where you start counting) with the market transitioning from relief that the bottom has been put it to optimism of possible renewed growth. It feels like the end of an accumulation phase and the beginning of the mark-up phase.
Yes it’s taken a long time but the trauma of the Financial Crises Crash was severe. We can talk about interest rates, bottom line vs. top line growth, balance of trade and other currency issues. But bottom line, there’s also a lot of damaged investor psychology involved and that psychology requires a lot of time and therapy to heal.