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Is The Market Confused, Or Is That Just Me? at Trader’s Narrative

Is The Market Confused, Or Is That Just Me?

Depending on the framework you use to understand the market, at times it is possible for the market to be “confused” or even “wrong”. Of course, according to some, the market is the perfect amalgam of all relevant information so that isn’t possible.

But then again, any student of the financial markets can easily call up many examples where the market exhibited what can perhaps be best described as collective temporary insanity.

As I look across this market, checking the advance decline breadth, the highs and lows, the VIX, put call ratios, and all the other technical indicators, I can’t shake the feeling that it is a bit confused. Or perhaps, it just can’t make up its mind and is trying to hedge its bets as best as possible.

Just look at the past few trading days! Up, down, up, down, up, down… ending up at pretty much the same place we started.

I’ve been accused of having a penchant for the bullish side so I’m trying to be more than careful in scrutinizing the weight of the evidence, on both sides. And for the most part, there is really no compelling reason to be in either camp right now.

Maybe (gasp) the retail investors are right and cash is the best spot right now.

The market certainly feels heavy, but while intuitively I think it wants to go down, I don’t see any strong reasons to push it down with my own measly contributions.

Here is a snapshot of the sort of thing I mean. This chart shows the percentage of S&P 500 stocks trading above their 10 day moving average. Notice how in mid July, as the market was pulled sharply lower, this very reliable indicator (check out the research report from Lowry’s), did not perform its usual magic:

percentage stocks SPX 10 day moving average september 2008

Is it too much of an obvious to say that this market is being driven by the financials? They were responsible for the mid July spike down in the behemoth S&P 500 Index. Pull up a chart of the 90 day Treasury Bill and you can see the epicenter of the quake that shook the markets.

I’ll go more in depth in tomorrow’s weekly sentiment overview and we’ll see if we can make any sense out of this crazy tape.

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3 Responses to “Is The Market Confused, Or Is That Just Me?”  

  1. 1 Bill K

    Yes, The Market is confused! Here is my take on the confusion. I think that financials are the concern of the week because of WM and LEH but not the overwhelming all encompassing concern they were for the year leading up to the July bottom. To verify this fact one only needs to take a quick look at the XLF and see that it shows that financials have in fact performed much better then the overall market since the July bottom, when the financials led the way down.

    One of the main concerns Since July was inflation seemed to be making it nearly impossible for the economy to ignite a bull market again. This inflation reality and fear was caused largely by the commodity bubble that we were in. Now that the commodity bubble is imploding the traders are over analyzing this information. They think that commodities are going down because we have a much bigger leg down coming in the world markets and this will cause huge demand destruction for all commodities. But in fact, in my opinion, it is just as simple as another bubble bursting. So the commodity bubble bursting is a being mis-read as an ominous bad sign for the future when in fact it is just a huge positive for the market short term and long term.

    With this confusion theory as my guiding light, I have been getting fully invested on the long side in recent days every time the market sells off. I am no longer worried about financials, even though that was the guiding force down in past days. The government has clearly shown that it will not let the worst case possible happen to these companies. I subscribe to the double bottom successful retest theory, until proven wrong with a new low close below 1200 on the S&P 500.

    Just my 2 cents.

    Bill K

  2. 2 Babak

    Bill K,
    thanks for your analysis. I agree with your basic premise but I’m a bit more cautious re equities.

  3. 3 Johnny L

    The financials are the foundation of the market; i.e. no lending, no expansion, no growth.
    As the financials go so goes the market. The longer it is propped up the uglier it will be.


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