It is not the end of the world
Most market weaknesses have fast selling phases and slow selling phases. The fast selling phases are dangerous, but once market settles down in slow selling mode, you will see 100 or around that number 4% downside breakouts a day. In those phases the EP, Virgins and Double Trouble still work, but you have to scale down your profit targets and take quick profits. At this stage it is difficult to tell how the move will progress, but a reflex bounce is high probability.
When a market goes down a lot in a day, all the kind of systems discussed in the James Altucher book , Trade Like A hedge Fund , kick in and that invariably leads to bounces. Even though Niederhoffer has blown up again because of excessive risk taking, what he says in his two books The Education of a Speculators and Practical Speculation is very useful framework to keep in mind and is supported by years of statistics. Panicky moves always resolve to upside and markets have an inherent upward bias.
Most of the time such panics are not directly related to underline fundamentals but linked to some business blowing up, some hedge funds or group of funds blowing up, or systemic issues. Because bulk of market participants follow sound risk management strategies, in such situation the selling feeds on itself as more participants are forced to sell to manage risk. When that phase passes, we have roaring rallies like we witnessed in August/ September. Bearish phases in market tend to be of short duration.
When a market goes down a lot in a day, all the kind of systems discussed in the James Altucher book , Trade Like A hedge Fund , kick in and that invariably leads to bounces. Even though Niederhoffer has blown up again because of excessive risk taking, what he says in his two books The Education of a Speculators and Practical Speculation is very useful framework to keep in mind and is supported by years of statistics. Panicky moves always resolve to upside and markets have an inherent upward bias.
Most of the time such panics are not directly related to underline fundamentals but linked to some business blowing up, some hedge funds or group of funds blowing up, or systemic issues. Because bulk of market participants follow sound risk management strategies, in such situation the selling feeds on itself as more participants are forced to sell to manage risk. When that phase passes, we have roaring rallies like we witnessed in August/ September. Bearish phases in market tend to be of short duration.
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6 comments:
I would say that the selling feeds on itself because the bulk of market participants follow UNsound risk management strategies - if their strategies were truly sound, would they be "forced to sell to manage risk?"
"Most of the time such panics are not directly related to underline fundamentals but linked to some business blowing up, some hedge funds or group of funds blowing up, or systemic issues."
Agreed, but this market is changing. There are fundamental reasons why MER's CEO got fired. You cannot negate the state of the BKX. This is a development that has taken time to show itself and only recently became strikingly obvious. The bears actually got something right. This is not a pullback in financial stocks. When people start putting their money where there mouths are, I listen.
Although I think we're headed higher this year, I can no longer be a bull on all US markets next year, only selectively like tech stocks.
F-Trader,
Agree with your statement.
After a 5 yr Bull run, time for a much needed correction starting in 08
Liquitidy and housing issues still a problem. IE. C calls a emergency weekend Bd meeting
I tend to agree, this quarter so far earning growth is still in double digits, better than most people expected. What's the average PE, still 16 - 20? Consider what we were in 2000, I think the stock market in US is still in good shape going forward.
I do worry a little about the credit crunch and Chinese stock market. I have been recommending Chinese stocks, got scared. Pradeep, do you have any sense if there will be a crash? If there is, how will that affect the US stock market?
Thanks,
Market Swimmer
By the way, I have a new site, you can find more from the existing site. Could update the link of Market Swimmer to point to the new site? Thanks a lot.
Nov5 and looking awful premarket. Is it the end of the world now given how awful this credit thing is starting to look? or just another speedbump on our way to new market highs?
Mike,
IMO: I think we see another good upside starting next week into 08 and the by mid Jan. may see some signs of weakening.
Jack
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