Different Reactions to Market Turbulence
By Quint Tatro Oct 12, 2007 11:00 am
...at some point, something triggers a bout of profit taking and stocks tumble.
I am always fascinated by the natural response when the financial markets experience a little turbulence. Typically, the first reaction is a scramble to figure out what the catalyst was and an attempt to measure its significance. Within seconds those that have held strong convictions in one direction or the other are out defending their position with either a justification or an 'I told you so.' Yesterday was no different.
The market has been trending steadily higher since the recent summer draw. The bullish move has been relatively textbook, going through three psychological phases. The first was skepticism whereby most believed the initial bounce would fail followed by minimal acceptance where most remained skeptical but started to accept the possibility that the worst was behind us, followed by the final stage of broad embracement. Regardless of what most thought weeks or months ago, they were participating and ironically becoming more optimistic the higher we ran. This cycle is healthy and normal and is why markets tend to go higher and trend farther than most expect.
Then something changes. It may change for a few minutes, a few hours, a few days or even a few weeks, but at some point, something triggers a bout of profit taking and stocks tumble. The reaction is always the same where those who are first to sell are typically the ones who entered early and have no problem booking gains and those that have only recently started playing along, feel almost cheated and are the ones who grasp onto hope that the drop is merely temporary.
The most intriguing part of the phase we are in now is the discussion of why a drop occurred. Yesterday, there were a few assumptions and now it is being widely debated. Was yesterday the result of European Central Bank comments, analyst comments on Baidu.com (BIDU), poor retail news from Target (TGT), or a mixture of that and more? It is the job of pundits to come out and discuss these matters in depth, allowing the individual the opportunity to make an educated decision on whether they believe yesterday's blip will lead to more downside or is only temporary.
I however, strongly attempt to view the situation completely different. The tape has been trending higher and stocks underneath have been acting extremely well. Lately, that has started to change albeit in a very subtle fashion and yesterday we saw the tape do something it hasn't done in several months. Why did it happen? I could care less. What will the result be? I have no idea.
I realize this concept is foreign and hard for many to grasp however, I work very hard to drown out the noise and only listen to what the tape has to say. The last few days the tape has been whispering and yesterday, it yelled. I took action accordingly and have now adopted a wait and see attitude. I will let others debate about where we go from here and what was the cause of yesterday's drop, while I sit patiently letting the action play out until I feel comfortable stepping back in. I will protect my capital and commit nothing until I am certain the risk reward is back in my favor.
In a few short days we could be looking back on yesterday with a smile as it was nothing more than a short blip that served to shake things up a bit. I will gladly accept this and move on accordingly, or we will look back and see that it was the start of something much more.
One thing is certain. There is not a soul on this planet that knows for sure and if they tell you they do, they are lying. Rather than guess why not wait it out until we are absolutely certain the worst is behind us?
No positions in stocks mentioned.
=><= p=" "><= p="">
Get The Minyanville
Daily Recap Newsletter
Daily Recap Newsletter