The most powerful weapon a Bull market has is the "legitimate" scorn of the sellers.
Any successful trader knows that top-picking is a pretty stupid thing to do. You can only get it right once. You can get it wrong hundreds of times. This logic, of course, does not stop a lot of traders from top-picking. Witness all the smart technical analysts and fundamental value investors who have dumped fortunes into the "short" side of this market for the last 3,000 DJI points.
"How can the market keep going up?" they moan. "It's nuts!" they beg. "You're broke," says their broker (is that why they call them brokers?).
The market will correct. No doubt about it. The South Sea Bubble ... burst. In Holland, 15th Century tulips turned into houses ... and then back into plant bulbs. 1929 actually happened. The bear market of the 1970's chased millions of investors away from the market for over half a decade. 1987 turned a lot of financial geniuses into cab drivers.
The question is not "If." The question is "When?"
Which is not to say that the "Why" is not important. Why does the market shrug off lower earnings and Asian Contagion and market valuations that have their basis in earnings from the next century?
You want a good "funnymental" reason for Dow 10000? Here goes.
After the serious correction of October, 1997 (a mere downward blip on the Great Bull Run of the 90's), portfolio protection became increasingly popular among institutional money managers. Similar (but not identical) "insurance" fueled the Black Hole on October 16, 1987. Back then, it was called "Naked Put Selling." The stupidity of it led to a collapse that a lot of bigtime money managers today can't even remember (because they were in high school). But the lesson is not the collapse. The lesson is the time it took to get to the collapse.
I recently spoke to a trader who was a CBOE market maker back in '87. He re-iterated that, at that time, investors were buying calls and selling puts (any put) to pay for the call ... it was a lock, a sure bet, they were told by their brokers. At worst, the put would expire worthless and pay for the call, so ... no loss. The calls, naturally, were going to the moon. Sound familiar? Deja whoops? Then the retired market maker said something which stopped me in my tracks. "So, I guess we will keep getting a reverse crash ... I have always said that one day we would get a 500+ UP move in the DJI just as we had that -500+ day in '87."
Now that would be a fitting end to the bull (at least for a while).
Today, institutions use a very similar methodology of "value protection." They buy something called a "collar", where they sell calls to buy puts. The "neutral" market makers and specialists who provide the put/call spreads must (in order to remain neutral, and thereby solvent) hedge the risk by selling the underlying equity/index/share/whatever. This drives the fair value of some futures below fair value. Below fair value! Arbitrageurs disappear. They decide to stand aside and hold positions which they can't unwind without losses. Their positions cannot be increased because there's no paper left to buy. Result: in many markets, an almost continuous double-digit rally since the middle of January. The futures in many of these markets remain below fair value. That, in turn, increases the demand for protection in order to lock in even greater gains.
As a portfolio manager recently told me: "There's still plenty of space for rent in the bubble."
It's fueled even further, of course, by greed and "performance" yardsticks. Asset managers don't want to get left behind, so they cover their butts by buying back their calls (which have become more valuable, only the asset managers don't keep up with the increases because they put "collars" on their profits when they wrote the original calls to buy put "insurance").
Of course, over time everything will return to normal. The return trip will undoubtedly be painful. It always is. In my opinion, EWave projections, properly done, should provide some useful clues as to when the journey starts.
It is not, in my opinion, right now. The bubble has a lot more elasticity in it than the sellers (and most EWavers) would wish. And remember ... all said and done ... top-picking is pretty stupid. You only get it right once. In an average day, a broken clock can do better than that. My free website is at concentric.net ... Great trading! See you after the close! |
