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Da Market Code


While no one can claim to understand the market we are all trying to interpret its behavior.


Editor's Note: Minyanville is pleased, proud and very psyched to introduce Woody Dorsey as our newest professor. Woody is the founder and president of Market Semiotics, an independent research firm that analyzes the market based on behavioral finance. For the past 20 years, his vibes have been read by many of the world's top hedge funds and institutional money managers. And now, through the magic of Minyanville, he'll be sharing his insights with ye faithful.

Has the Market Changed?

We all want to interpret the market correctly but the market likes to be misunderstood and keeps on changing its code. We have to try to take a cue from whatever clues we can find. The recent increase in volatility seems to signal that a new kind of market is afoot. After all, 13 days of declines in May wiped out the prior 14 weeks of gains. We also saw a significant sentiment torque from 98% bullish on 5/8 down to 3% bullish on 5/12. We have found that these torques are coincident with compelling changes in confidence that often initiate durable price trends. Da Market Code may have changed and more bearish clues may be coming.

A Review of the Bidding

We try to distill market themes into key epithets which may typify the capital market narrative: Our view has been that the end of the bull market in paper assets was partially the result of what we called the Lapdance of Liquidity. Central Bank culture was allowed to become excessively permissive. One may ask, when are Fed Funds going back to 1%? When is Crude Oil going back to 10 dollars a barrel? Never? Well, not very soon. The peak in paper assets and the logical consequences of excessive Liquidity coincided, naturally, with the onset of a secular bull market in commodities. We have been calling this: The Re-Pricing of the Planet. It was only a matter of time before this Re-pricing paradigm would engender a notable disequilibrium in capital markets. Financial culture has only recently recognized or acknowledged an INFLATION. This recognition seems to be triggering a new capital market phase.

Equities were Borrowing the Commodities Scenery

Equities had been benefiting from a Commodity Shakkei (Borrowed Scenery.) This Japanese landscape concept is the technique of using a distant perspective to enhance the appeal of a local landscape. The Commodity boom was being translated by stock markets as the ratification of a bullish global economic and earnings boom. That was the glass half-full perspective but it denied much of the Shadow side of Financial Culture. What do Birdflu, Immigration, Protectionism, Iran, Climate Change, Gasoline Prices have in common? They were part of an obvious but latent paraptakarma (accumulated causation.) A plethora of conceptual threads can, in a paraptakarma, suddenly weigh on the market seemingly all at once. The market may then change its mind (Metanoia). Did you know that interest rates were rising? Did you know that there is inflation? Did you know that commodities were booming? Did you think that it might eventually have consequences but not now? Most investors were in denial until early May!

Diagnosing Market Behavior

The recent tipping point in markets may be the acceleration of extant but latent secular trending functions. Note that the typical smart money play would seem to be to try the contrarian side of several markets. Silver looked like a short and Bonds looked like a buy. Overdone markets are not exactly reversing! The risk is that severe trending functions could accelerate this Summer? What if, Commodities are not in a bubble, Energy is still in a Bull market and Stocks are now in a Bear market. This does look like the start of the next bear market but it is still early. We investors assume that we are trading in the moment but we are generally basing our perspective on the past, albeit perhaps the most recent past. Of course profits always lay in the future… so we really want to know, the future of now, as it were. The best way to do that may be to make informed inferences. If one can confirm that the market has indeed changed its behavior, then the new trend may be about to become your new best friend.

The Market has Changed

While no one can claim to understand the market we are all trying to interpret its behavior. The action of prices, the torque in sentiment, conceptual reversal and sharply increased volatility all indicate a change from the prior phase. This correction seems different. Thus the strongest inference may be that there is a new trend unfolding. Investors have changed their minds and changed their risk appetite. Current equity pops are just that…only pops. The Market has changed. Watch the Behavior and, as always, Minyan On!
No positions in stocks mentioned.

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