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800 Pound Gorilla in Our Midst

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With yesterday's breach of 2003 lows, a wave of fear flushed through the market.

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"I haven't seen a beating like this since I put a banana down my pants and turned the monkey loose." -Cousin Eddie, Vegas Vacation

S&P 840 has been bandied about since October 10th as the potential 2008 trading low. All the classic capitulatory signs were there-genuine fear, bid wanted situations, an eye-popping spike in the VXO and a vicious upside reversal.

It sure felt like the nadir was in and despite my bearish bent for the better part of the year, I opined as much in Minyanville and other media channels.

While I was careful to note potential flies-most notably the credit caveat and the implications of a stronger dollar-there's no crying in baseball and no hiding in the 'Ville. I was wrong, it happens and it's time to move on.

With yesterday's breach, a fresh wave of fear flushed through the market. Emotion is the enemy when trading, particularly with fragile psychology, and that introduces a volatile unknown as the process of price discovery permeates.

S&P 770 (2002 lows) to S&P 840 (past support is future resistance) is the new range.
Mr. Valentine has set the price with a conscious nod that technical analysis is but one of our four primary metrics.

Along those lines, a quick sniff of our current state:

Fundamentals

Horrid and getting worse, according to channel checks, although we must remember that news is always best at the top and worst near the lows.

Structural

Credit remains the single biggest wrinkle in our collective forehead. The flip side, as mentioned yesterday morning, is the potential for greenback exhaustion, which would lend itself to a counter-trend asset class bounce.

Technicals

As discussed above, we've broken the level that was on everyone's radar.

The fatal flaw of technical analysis, however, is that financial assets are considered "better" higher and "worse" lower which is the mirror image of a profitable scrimmage.

We're deeply oversold as well, although we can remain in that state during bear markets.

Psychology

It's about as dour as I've ever seen it and that's typically a contrary indicator through the lens of "sell hope and buy despair." Of course, if societal acrimony shifts to social unrest or geopolitical aggression, we'll see a new slew of emotional decisions.

John Maynard Keynes once said the market can remain irrational longer than most people can stay solvent. He was a smart cookie, even if you believe (as I do) that debt destruction is the only rational outcome following years of living beyond our means largesse.

Be that as it may (and it may be wrong), I added exposure into yesterday's decline and I plan to do the same today. There is a thin line between risk rationalization and using price to your advantage. It's called "profitability" and while that remains an open question, I'm afforded the opportunity given my uber-conservative stance this year.


Where you stand is a function of where you sit so play within your means and keep your chin up, buttercup, for this too shall pass.

A few quick points of parliamentary procedure, in no particular order:

  • Only risk what you can afford to lose.

  • Good traders know how to make money but great traders know how to take a loss.
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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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