Is There a Method to the Badness?
By Vince Foster Aug 27, 2012 10:55 am
Not all market strategists are created equal.
On Tuesday, we got the gap above 1420 only to reverse closing near the lows of the day. We followed up with a post entitled "Ex Ante Analysis."
that's how tops happen... time for defense down to 1360 and 1340 into Labor Day when the big boys come out to play..
The market continued lower into Friday, but with Friday's move into1400 on short-term oversold conditions and diverging momentum, the market staged a nice rally to finish out the week with minimal damage. Nevertheless, it was the first down week since July 6.
Now how did I do that? I don't have a crystal ball and I don't even work for some know-it-all hedge fund or on a Wall Street trading desk. It comes from experience in knowing how to think like a crook. The stop run flush at a key support or resistance level is the oldest trick in the book. When you have a level that everyone sees, it's best to expect a head fake that takes out the last to capitulate.
When we wrote "Trading the Wrong Playbook Bubble" citing the trading strategy of Billy Ray Valentine, this is exactly the kind of move we were talking about. It's the proverbial "clearing out the suckers" trade.
While sitting in the dentist chair with a metal pick scraping my teeth on Wednesday afternoon, I was watching something equally as irritating: A technical analyst on CNBC's Fast Money butchering a chart of the S&P 500. In what has to be the most popular chart on Wall Street, the analyst was calling for an 8%-10% correction based on the inverse correlation with the VIX (^VIX). It was like a kindergarten lesson with Magic Markers and coloring books.
Simply overlaying the VIX with the SPX and concluding an 8%-10% pullback is not analysis, technical or voodoo -- it's guessing. Not to mention the fact that they had not discovered some new undetected relationship or correlation. That chart is so old and overused that Grandma has it posted on her bulletin board.
Why does it seem that the work coming out of Wall Street is so mediocre and elementary? Is it collateral damage from the financial crisis, or have they been so burned by being wrong that they have succumbed to the prevailing fear that they are responsible for causing?
With these questions in mind, I wanted to dig a little deeper into what is driving Wall Street strategists' pessimism in the face of market performance. I went back to the Bloomberg article from Monday to break down more of the specifics. When you click on the link, you can see a chart of the current average Wall Street strategist year-end estimate for the S&P 500. If you click on the chart tab on the left, you can pull up a more detailed chart with the ability to overlay the S&P, which is very similar to a chart that was in the Bloomberg story on my terminal.
No positions in stocks mentioned.