- Momentum builds up slowly, then when momentum gets going, the market also at some stage becomes vulnerable to correction. The momentum build up started a couple of weeks ago. In last couple of days it was the best period for something which broke out 10 to 20 days ago. At some stage buyers exhaust themselves and market correct. Action like what we saw yesterday is a good lesson in how momentum at extreme level becomes vulnerable to small trigger.
- While many are blaming Greenspan for market reversal, in reality market was very vulnerable to correction, by 1 A.M., readings on50% plus were 20, that is when I made my my post on momentum cycle and started paring down positions. Such high level of momentum make fresh entries risky and open profits vulnerable to corrections.
- At the end of the day, even though the reversal looked ugly, the number of stocks down did not increase dramatically. So this move is likely to try and squeeze out more upside till month end. After all the best trade so far has been buying any weakness or pullback. So market participants will continue that behaviour unless proven wrong.
- Days like yesterday can be psychologically unnerving to many short term traders. Because the market was easy to trade for 4-5 days because of momentum, they become increasingly confident, probably put in bigger position and then the turn in momentum cycle catches them off guard, leading to losses and bewilderment. At least that used to be my reaction in beginning years of my trading. You can very much find out who is a rookie by reading when you see them blaming Greenspan for market reversal. The market would have corrected even if some Barry, Larry, or Gary made some comment. At some stage red hot momentum simply is not sustainable and leads to reversal.
- The other parlor sport in recent years has been for everyone to claim that they are smarter than Greenspan. Those who cannot even spell macro economics , conveniently offer their opinion on how Greenspan is wrong. Similarly market commentators and newsletter writers , whose personal record of market prognosis is worse than Greenspan waste no time in criticising him. All these are the kinds of games and traps one should stay away from if one wants to make money in market. These are all distractions, while the real profit opportunities are elsewhere.
- The other theme which has suddenly caught investors fancy is China and Chinese market. While that risk exists, ultimately on a day to day level, you still need methodology to profit from it.
- Mortgage sector was attracting buy interest yesterday and number of stocks which were just a few months ago were driven down by panic have had smart rallies. Some have more than doubled in few months from panic lows. That is why panics are good for market.
- Victor Niederhoffer often quotes Henry Clews when it comes to market panic, that advise is true of sector panics also:
Henry Clews wrote in Twenty-Eight Years in Wall Street (1887):
But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes, these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers’ offices.
Then they always buy good stocks to the extent of their bank balances, which they have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big “rake in.” When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the up grade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosoms of their happy families.