From Jeff Cooper: The man has a way with words . . .
This was written on THURSDAY:
This is the month that the catch-phrase B2B took on a new connotation: Boom To Bust. Fueled by exploding margin debt, the shooting star -- a.k.a., the Nasdaq Composite -- fizzled out, as market participants who went to lock in profits before the end of the first quarter found that an old market axiom -- "Sell? Sell to whom?" -- still rings true. It was a time of reckoning.
Among the momentum crowd, it was monkey-see, monkey-do. Short-term traders had nothing to lose, except the overnight gaps and laps, while the buy-and-holders saw no evil, heard no evil, and spoke no evil about the most-expensive market anytime, anywhere, anyplace. The inexorability of a market that could climb the Empire State Building was the new American mythology. The public got it: The market always comes back.
Whatever banana peels intermittently interrupt the vertical ascent of the equity ape, its relentless toehold on the American psyche is always regained. Right? Like a hyperventilating Faye Wray, the economy is locked in the grip of Speculator Kong. The markets finally realized that the Fed was not shooting blanks. Now this question arises: Has anyone ever seen a dead-gorilla bounce? "But even a rising tide from here is unlikely to lift all boats. The yachts may rise, but the dinghies likely will remain waterlogged."
As a short-term trader, I've learned the hard way that on a short-term basis, as well as on an intermediate-term basis, learning to sell while the ducks are quacking is one of the most important market lessons. You must be willing to leave money on the table for the next guy or gal. Trading is not a game about picking tops or bottoms; instead, it's strictly a business about capitalizing on market movements. The name of the game is putting numbers up on the board and making them grow.
The burnout in the most speculative, high-flying sectors of the market breaks a long belief that the market only goes up, and that the buy-every-dip mentality is instantly rewarded. Left praying are those buy-and-holders who have an obsessional deafness to the idea of stop losses to protect themselves; and they rationalize that markets can't be timed. True, markets can't be timed precisely, but you don't need to be perfect to protect big profits.
The current market behavior is about volatility. And almost everyone believes there is no precedent for the current volatility. However, there are two periods -- in the late 1920s and the early 1930s; and in the late 1960s -- that show just as much volatility (if not more) on a percentage of daily range. . . .
. . . .Yet another reason for the extreme recent volatility is the arrogance and greed of money managers who think they are bigger than the market. They believe they can sell WXYZ and buy XYZ, without missing a beat, and be correct on both counts -- without ever going to cash. In an attempt to capture performance at the expense of discretion, these managers try in the middle of a horse race to switch from one galloping steed to another.
The odds of success at this kind of endeavor, without getting trampled, are slim. However, there are 3,000 stocks listed on the NYSE, and 8,000 funds. Never underestimate the potential of People in High Places with O.P.M. (other people's money)!
The bears would tell you that the Nasdaq has blown off, while the Dow/S&P went nowhere for a year and have already seen a bear-market rally phase. The majority opinion, among bulls and bears alike, is to expect a successful test on the Nasdaq. That indicates that we might be going much lower than the 3,649 low of April 4. The percentage of bullish advisers has actually increased from 54% to 56% during the recent carnage. That's not usually the sign of a low.
But then again, none of the traditional indicators and rules of the game have worked for a while. That's what you might expect at an important top. The game is designed to suck in the most players and the most money at highs. If the Nasdaq has made an important top, investors will continue to buy it all the way down, selling out only near the bottom. If you had to map out a top of the most expensive market ever, wouldn't you expect a mania to be followed by the kind of schizophrenic moves reflected in the divergence among the indices? And, interestingly, for the last 200 years, every election cycle ending in zero (with the exception of the 1980 Reagan election) showed a marked decline going into October.
. . . . .Moreover, the 1998 decline was caused by external events. This time, there is no real catalyst.
The rally just burned out from its own brightness, if you will, like a shooting star. This time the Fed is unlikely to be at the spigots, lowering rates. So the corrective process will be driven as much by price as by time. It takes time to heal overvaluation. Confidence has been shattered. In times of stress and panic, liquidity gets fragmented. The choppiness is likely to reign for a while.
The worst mistake traders can make is to overtrade and try to catch every move. The last six months created many adrenaline junkies. Sometimes the hardest thing to do is to do nothing. Watch and wait until you see the whites of their eyes. Most importantly, preserve your powder. |
