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Remember The 3-Alarm Sell Signal? at Trader’s Narrative




Remember The 3-Alarm Sell Signal?


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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.

morgan stanley 3 alarm sell signal

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.

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9 Responses to “Remember The 3-Alarm Sell Signal?”  

  1. 1 Tom

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    Babak,

    You say that call was from last year but then point to June 2006 on the chart. Which one was it?

  2. 2 Ed

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    Yes, the chart is in error. The call was in 2007, not 2006.

  3. 3 Robert

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    Yeah, I remember that happening in 2007.

    Pretty good call, actually.

  4. 4 Babak

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    Crikey! that was a silly mistake. You’re right I mixed up the years! sheesh
    note to self: get more sleep

  5. 5 Richard

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    Babak, I am not sure what you are talking about in this article. The Morgan Stanley call was almost right at the top of the market. Very good call.

  6. 6 Babak

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    Richard, yeah, I’m not sure what I was talking about either.
    this was one giant brain fart :-)

  7. 7 Johan

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    Babak, remove the chart if it’s wrong. It might confuse people.

    Have a nice day!

  8. 8 Babak

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Johan, I was going to but that would be dishonest and may be seen by some as an attempt to hide an honest mistake. Instead I’m going to put up some flares around the post with a mea culpa :-)

  9. 9 Robert S.

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    Babak:

    That was well handled. It was an honest mistake.

    What I find strange is how this Street Strategerist isn’t grinding this one home now. Maybe because MS has more to worry about? Who knows.

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