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Pandora's Stocks?


Don't make the same mistake many traders made in 1987 when they assumed an October pullback was a repeat of the pattern in the spring.

While horsemen ride across the green
And Snow White still remains unseen.
Pegasus, the winged horse,
Relays his messages by Morse.

-Pandora's Box (Procol Harum)

"I am convinced that through these measures we have reestablished confidence."
-Herbert Hoover, December 1929

"The past, although it may not repeat exactly, often rhymes," Mark Twain said.

Historical formations in the financial markets may not repeat exactly, but patterns often echo across the canyon's mass subconsciousness.

Strands of the psyche of generational DNA span the human chasm of cause and effect.

The market's cypher of action and reaction is a Pandora's spiral: opening the lock to look for logic lets loose a spiral of more questions than answers, or more confusion than clarity.

Speculation is observation, pure and experiential. Thinking isn't necessary and often just gets in the way.

More often than not, gauging the market is more about using the right brain and being receptive to pattern recognition than the cognitive "logic" of the left brain. Many times we don't know what there is there until long after the financial Richter scale has already moved.

If volatility is the market's métier, then equilibrium is its handmaiden: historical cycles of fear and greed often trace out repetitive patterns, the mirror and the pendulum playing hide and seek: the dance of reason and emotion.

The analogue I have offered to the summers of 1957, 1987 and 1990 took a giant leap closer to the Twilight Zone and one big step for Boo with Thursday's thumping.

Click here to enlarge.

The reason for Thursday's breakaway gap to the downside lurks like Freddie Krueger in a "Nightmare on Wall Street."

When I walked into my office Thursday morning, my first reaction seeing the futures down 16 points was to make the rounds and find out what "the news" was. Something must have happened, right?

Strangely, no one could point to a culprit for the selling pressure. No explanation. No event.

And in the financial news, there was an almost otherworldly denial of the drubbing that surely lay ahead.

The usual suspects of higher oil, housing and the mortgage mess were rationales and excuses to the buying opportunity and reversal that apparently lay directly ahead, as if the crimson tide would be ephemeral.

Lay out the red carpet for Pavlov and the army of algorithm boyz. Carpet bombing maybe.
After all, nothing had changed, right?

The market's sails have been sufficiently fluffed up with an air of invincibility as a litany of concerns over the last year have been conquered. Nearly every bear that cried wolf was well-ridiculed to the point at which many high profile bears had not only capitulated but had purchased condos in Pamplona.

With the futures down substantially pre-open Thursday, the complacency felt palpable. No conspicuous catalyst was being offered up. And we remember that crashes don't come from too much bullishness but from excess complacency.

Whether the breakaway gap that would occur on Thursday's open was up to forced liquidation, a credit crunch spiral or a fund gong belly up wasn't being preferred for public consumption.

But someone certainly knew something.

However, the more the catalyst for the carnage avoided the limelight, the more nervous the street became. On Wall Street fear of the unknown is the greatest fear of all.

The more time passed without a discernible "reason" for why the known negatives should matter now, the more it simply generated more fear that something unknown was in the wings. Things matter when Time turns trend.

Then, the announcement that the White House Economic Team was going to hold a rare media garden party on Friday morning. Something's up, I thought. What is it they know and when did they know it? As posted on the Buzz & Banter, I sensed that the legs of the M would be broken carving out an outside month down and that equilibrium would send the S&P down to prior highs in an echo of the Feb 27 400 point decline.

Remarkably, a late snapper saw the S&P bounce right back to the bottom of the M where the Monthly Swing Chart turned down, 1484. The market seeks equilibrium. However, heads up, traders.

Click here to enlarge.

There is a natural inclination to look back to the last correction and think the market will trace out a similar path. Don't make the same mistake many traders made in 1987 when they assumed an October pullback was a repeat of the pattern in the spring.

Click here to enlarge.

Let's not assume Thursday's pullback is another 400 point one-day-wonder like what played out this spring, until it's proven so.

Click here to enlarge.

If government officials continue to promise us a rose garden with respect to comments like Boom Boom's in January that the worst of the housing downturn was behind us and Paulson's that subprime slime is contained, they will lose credibility and, Working Group or no Working Group, will inspire a lack of confidence. And a lack of confidence can breed fear: to be sure, this is a confidence game, (no pun intended). A sense that we aren't being told the whole story can generate a sense of panic and open up a financial Pandora's Black Box where programs and derivative dominate market dynamics.

Contained, contaminated. It's a mantra.

In Greek mythology, Pandora's curiosity caused her to open a box, releasing misfortunes on mankind. She shut it in time to keep in one thing--- anticipation of misfortune. Without the ability to tell the future, this gave society hope.

Hope is a good thing, but in the markets it sucks.

So, I'm wondering which one of the Bush Brigade will be wearing the Herbert Hoover mask in the Rose Garden Party today.
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