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Psychology Patience


The first half hour promises to be quite noisy!


Good morning and welcome back to the flack. Last week's pounding was quite astounding as the bulls got smoked while not rebounding. It was the first grime in quite some time that the crimson tide didn't stop on a dime. Will Hoofy fight back with an upside smack or can Boo continue his furry attack? It's a new week in the critter boutique so let's settle in and take a peek!

Of all the primary trading metrics (fundamentals, technicals, structural and psychology), the matters of the mind are the most intangible. We can eyeball technical levels or monitor the business climate and mechanical underpinnings (of the market) but when it comes to gauging psychology, it's subjective at best. As perception is reality in our world--and the identification of a disconnect between the two is so important--trading therapy has assumed a huge role in the financial decision making process.

If there are three psychological phases to each trading move (denial, migration & panic), what's the current diagnosis? The ability to identify the relative position in that dynamic can help formulate a proper and profitable strategy. There are two ways to interpret the recent weakness--it's either a pause in the bullish migration or the spankin' fresh start of the bearish "denial." Hoofy, ever the optimist, will argue that the NDX has pulled back (to the 50-day) and alleviated the overbought reading while the S&P has found a sticky congestion zone (remember the summer flirtation with the G-Spot?). With a stair-step rally supporting his posture, it's hard to argue with the brave and brazen bull.

Boo, for his part, is quietly rubbing his paws together as he readies for his long awaited feast. The lopsided sector bell curve, crowded bull camp and general complacency are his recipe for disaster. No catalyst, you say? "No worries," he replies, "that's exactly the problem, there are no worries!" As the thinking goes, a decline right now would be a textbook case of denial. "By the time the catalysts appear, we should be shifting into Migration City. Then all of those gauges (VIX, bull/bear, insider sales) that don't matter anymore will seem prescient!"

To be sure, the once beaten bulls were in denial themselves when they (thought they) were duct taped to the ground. The initial lift higher led to a widespread rationalization and subsequent migration. It's worth noting that there were a series of false starts before the rally and, as we've seen, the same type of head fakes are occurring on the flip side. That's conditioned the bulls to buy dips and scared the bears into hibernation which, almost by definition, sets the state for an ursine upset (negatives never matter until the tape is lower).

Late Friday, when discussing the market, my friend called me the poster boy for bearishness. While it's certainly true that I relate to Boo, I always like to see both sides of every trade. Yes, this could be a pause in Hoofy's cause--performance anxiety (quarter-end and year-end), liquidity and "good enough" data points may spur another bovine blur. We must acknowledge and respect the stacked deck and understand "it" may take a rain check. At the end of the day, however, I've gotta call 'em as I see 'em and when push comes to shove, I wouldn't wanna be 'em.

One step at a time, my friends, as we duck into the muck to make another buck. The early morning dew has a bullish skew as Europe and the futures are higher (while the dollar has some green back). I would consider a lower opening to be more bullish (a downside probe is almost inevitable) but, at the same time, tomorrow's quarter end adds an element of uncertainty. As such, following our tells is the first step to solving the daily mystery.

The breadth continues to smell the tale as it's been a relatively consistent directional indicator. The brokers broke their uptrend (from March) late last week and, along with the banks (BKX 881 is the 50-day), will play carrot to the minxy horse. In four-letter land, the semis in general (and semicaps in particular) will join the biotechs and internets as master beta plays into quarter end (please note that SOX 421 is the 50-day). With traders looking to find bang for their buck, the N's should be Charles in charge (either way).

Good luck today

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