Trader’s Narrative

Well, do ya? If not, let me refresh your memory.

Last year, on June 4th, Morgan Stanley’s market strategists released a message telling their clients of a “Full House” sell signal. The note didn’t attract any attention until June 6th when it ignited a sell-off in the European bourses and jumped the pond to North American exchanges.

The three alarms were fundamentals, valuation and risk indicators. The latter two had already been lit and with the higher bond yields and new stats on manufacturing orders, the fundamental indicator completed the triple threat.

First of all, the note was from a respected Wall Street firm and second, it had a fierce record: it had only happened 5 other times since 1980, with each instance garnering an average loss of 15% in the following six months.

There was some confusion because the Morgan Stanley US strategist had a different take and it wasn’t clear if the call was for just Europe or whether Morgan Stanley thought it had implications for other markets (it wasn’t and it hadn’t). But before things could be cleared up, the media had latched on to the headline and the damage was done.

So why am I bringing this up after so much time has passed? It is only after time that we can look at it with some perspective and perhaps, learn something for the future.

It is so easy to get caught up in the current market-tell, whether it is a Fed decision, ISM report or whatever. What isn’t so easy is to keep one’s head and remember that these effluvia are part and parcel of the stock market’s fog of war. Also, experts are hazardous to your financial health.

Morgan Stanley’s note did spook the market into selling off significantly. But the general sentiment was too bearish already for any real damage. We had a lukewarm retest in July which didn’t reach the June lows and away we went.

It is a cliché but that doesn’t mean it isn’t true: the stock market climbs a wall of worry. Looking at the chart above it’s pretty obvious that the 3 alarm sell signal was just a brick in the wall.

See any bricks today?

UPDATE: If you’ve read the above with care, you’ve noticed that I made a mistake in the years (2006 instead of 2007). The 3 Alarm Sell Signal was in fact a very good one and this post was a silly but honest mistake.