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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: stockman_scott who wrote (12592)	2/5/2003 11:34:32 AM
From: lurqer	Read Replies (1) \| Respond to of 89467

Expecting the Unexpected There are many differing perspectives from which to play our markets. One of the most fundamental aspects of these differing perspectives, is timescale. I often marvel at the daytrader. ST is minutes, IT is hours and LT is at most a day and a half. You want the really Big Picture – three days. My own perspective is the antithesis of this. Sorta makes me an anti-daytrader. Not that I am in any way opposed to daytrading, just that I have the opposite perspective. For me the big picture is measured in centuries. The LT is decades, IT is years and ST is months. I say all of this as a warning to the reader. The purpose of this post is to discuss what for me is the very ST – and not my forte (assuming I have one). On the decade timescale (LT for me), I subscribe to the thesis that demographically driven market cycles are the dominant factor controlling price. As the timescale gets shorter, the immediate significance of these long term cycles decreases. As best I can discern, this significance (of the long term cycle) ceases to be dominant some where in my ST timeframe – i.e. somewhere between 2 and 23 months. That’s not to say that the longer term trend is not a factor in determining the price on a time scale of weeks to a few months, but that it is no longer the dominant factor. Well if the LT trend is not the dominant factor, what is? For me, it seems to be sentiment. Now this is no big revelation. ST traders have long recognized the significance of sentiment in making their decisions. There is a well recognized arsenal of indicators for measuring sentiment, and established threshold values of these indicators for executing trades. A less well developed methodology exists for predicting changes in sentiment. While some changes occur because extremes reverse, others occur because of events. This enters into an area frequently described as exogenous events – those sudden, “out-of-the-blue”, occurrences that “change everything”. While I believe no one can predict the future, I suspect that much of what generally falls under the rubric of the exogenous, can be at least partially accessed. Moreover, let’s examine the effects of these unexpected events. Had they not occurred, the market would have moved in a certain way depending on a variety of ST and LT factors. So the effect of an unexpected event is to reinforce or mitigate an already existing market state. Thus the price pattern can be exaggerated or ameliorated by an event. An excellent example of an exaggeration (IMO) was 9/11. Many saw an impending bottom near the triple witching in the fall of ’01. However, the depth of that bottom was lower (IMO) because of Ben Luddite. The pending big event is the looming war in Iraq. Given the recent statements by the Bush administration, the most obvious “unexpected event” is no war. Many have speculated about this possibility, hence there is little reason to pursue that here. So for this discussion let’s assume there will be a war. What might be the “unexpected events” that could “move the market”? Well to know what’s “unexpected”, you must have some idea of the expected. Now let’s be careful here, I’m using the words expected and unexpected in a very particular way. I don’t mean that the unexpected is only what no one has considered, but rather that it is not “priced in” the market. So what is priced in the market? At this point I am going get much more speculative, and just give my own opinion. I believe that the seasonal “feel-good” counter trend rally that began in October has been cut short by (at least in part) an uncertain ill-at-ease about the pending war. This depressing foreboding will continue until the war begins. Then what? Now this is just a guess, but I believe that the dominant belief is this is Desert Storm II. As long as the war proceeds in a way that that belief is not challenged, then the market is likely to behave similarly to the way it behaved in the Let’s-Free-Kuwait war. Only similarly, and not the same because the long term trend is very different now from then. With this background, we can consider what might “go wrong”. I believe what might “go wrong” with the rosy war scenario (if there can ever be such a thing) falls into two broad categories – the war itself and ancillary terrorist attacks. In the first category, anything other than a blitzkrieg victory (e.g. door-to-door Baghdad fighting or Saddam’s use of bio-chem weapons), is like to perforate the euphoria and result in a precipitous market fall. Also, a major terrorist success (or several small successes) anywhere but Israel will also likely trigger a market plummet. So what is the probability of one or more of these unfortunate events occurring? IMO, one and more likely several of these “unexpected” events will occur. Hence, any war rally, echoing the previous Gulf war rally, should (IMO) be treated as a bomb that is ticking. – i.e. fade the rally. JMO lurqer