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S&P Watch: Market Won't Fall Without a Fight


Investors oscillate between a fear of losing and a fear of being left out.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

A host of comparisons with 1929 have been circulating on trading desks. How did 146 days of 46% increase lead to a large decline?

In the same spirit, the media have been breathlessly comparing the present to July 1939 (Which Todd's note alluded to yesterday).

Click to enlarge

(Courtesy of Seeking Alpha)

The reality is this: Media comparisons are irrelevant.

Just as 1939 isn't relevant (because of World War II, as I showed yesterday), I don't find the 1929 comparison relevant, either, since the 1929-1930 rally was the first bear market rally after the initial decline! Here's a chart from a note I wrote on February 25, 2009 talking about bear markets of the past.

Click to enlarge

Having run many statistical and econometric simulations, I've realized that it's possible to find correlations among unrelated variables, and even tweak certain things to suit personal preferences. And that's why, even though I personally rely on rigorous analysis, multiple stock screen views set up for each stock, popular and proprietary patterns and indicators, at the end, all roads lead to the same simple question: How does this action affect human emotion, and thus behavior?

History matters because we all feel the same given similar situations. And most of our actions are dictated by our feelings. Investors oscillate between a fear of losing and a fear of being left out.

I often say (and feel) that trading is an oscillation between agony and ecstasy. But the whole truth is that we feel our pain is absolute (e.g. pain in our little fingers feels more important than all the kids dying in Africa), but our happiness is relative (no matter what you have, your happiness depends on having more than what others have).

Ironically, it should be the other way around: The idea that pain is relative and happiness is absolute will make us better people.

But then, that wouldn't make up for an interesting tape, since there wouldn't be any "predictable irrationality."

Late February to March was all agony, and the S&P Short Range Oscillator captured some of it on the tape. Here's an excerpt from my Buzz note on March 3, 2009: "If past levels of the S&P Oscillator readings are any guide, a bear-market bounce might be either right here or a couple of really scary days away."

What about breathless ecstasy? Strength doesn't usually ebb away without a fight. Keep your eye on the semis.
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