January 21st, 2011

Pivot Points and Sell-Fulfilling Prophesies

Humans are habitual animals and perhaps investors are some of the most habitual of all humans. For example, we’ve become so accustomed since Labor Day to the market going higher that whenever it takes a couple of days off and retreats we start getting common withdrawal symptoms.

I guess it doesn’t help much knowing that as since it has moved moved higher so consistently and rapidly, the market is edging ever closer to a zone (1300-1350) that has seen six pivots since 1999. As a matter of fact, the last pivot was in 2008 when many thought the market had hit 1200, recovered a hundred points to 1300 only to be reflected off the 1300 zone beginning its cascade down to the 666 seven months later (click on image to enlarge):

No one can predict what the market will do now but there’s a good chance the market, in its pursuit of symmetry will replicate the 2008 pattern this way (click to enlarge):

Does it sounds crazy that the market participants could be so habitual that they repeat the same sort of thing they did a couple of years ago when the market gets back to the same level? I know my wife thinks so because she came in, looked over my shoulder at the above chart and said “I’m married to a crazy man!”

If I’m crazy to think this might happen then I’m not alone because there are millions of investors looking at the same charts at the same time, each one of them trying to decide whether they should begin to lock in some profits, generate some cash, move a little bit to the sidelines.

Pivot points become a self-fulfilling prophesy which only tangentially as explanations have something to do earnings reports, analysts expectations, valuations, European sovereign debt, housing starts and the price of tea in China (“Futures, which are down 2.3 percent for the week, dropped after China said inflation was 4.6 percent in December as the economy grew 9.8 percent in the fourth quarter…Bloomberg).

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  • The Average Jay

    Good reading thanks for the post.


  • oa92000

    MDY all time , not SPY


  • Anonymous

    some of high beta tech & semi. stocks have been down a lot last couple of days..(rvbd,ffiv, netl).

    Is there a seasonality here? just watching..

  • Joe

    Rather than seasonality, I'd call it "stock rotation". These stocks have had huge run ups since Labor Day and need a rest.

    The prospect of additional appreciation is less now than in some other sectors, like healthcare, financial and industrials. That's why the Dow 30 is moving higher while the Nasdaq is stalled.

  • Anonymous

    Yes , Dow 30 are slow moving..I like industrial & healthcare.

    Not sure about finance? Housing still a problem..