The New World Order of Markets

Happy New Year everyone! Was it just as simple as the turn of the calendar? Could it be the ugly bear is behind us, conveniently put into hibernation in the new year? I suppose some good feelings and a collective sigh are in order after the most horrific market performance in 75 years. What we have here though is a 'new' market of sorts, something that may look similar but is radically different. How so? Fewer participants, less risky players, a global community and weakness all around. Some new things are in store that we'll have to get used to.

What Happened to the Fear?

Markets travel up more smoothly when there is a barrier, the proverbial 'wall of worry'. The declining worry is bothersome to say the least, but from the nosebleed heights it could be more relief than trouble. With declining volatility comes declining option prices, a lack of fear is only a temporary situation until the market is ready for a big whack. Oh, I suppose with the credit crisis being managed, auto industry bailouts and any others that are out there...and the hope from a new administration that good vibes are being felt, or perhaps it's just relief. Whatever the case, bull markets don't start from a high level.

Volume, or Lack Thereof

The biggest indicator for me of a market trend is participation, namely buying or selling in size. I like to see institutions moving in/out of stocks...which tells me big price moves are on the horizon. I'm afraid those days may be behind us. Why is this? Nobody needs to tell you about the trouble of hedge funds in the past year, many of these funds have become roadkill. Thousands of 'em, and then there is Madoff. Oh sure, they'll morph into some form of a hedge fund in the future, but now there is serious talk of regulation. Add to that the lack of participation of brokers who became banks (what, only a handful left?) and what you have is a barren landscape. The days of 20-25 billion share weeks on the buyside are probably history. Look at the distribution that took place from Sept-Nov 2008. Money went out the door faster than water out of garden hose.

One Thing Remains The Same

Let's say we agree that Nov 21 was the bottom, SPX at 740. Has this bottom been tested since? Absolutely not. Textbook bottoms are almost ALWAYS tested at least once, and this cycle will be no different. In fact, the longer it goes without testing the more painful the fall would be. One could argue that the recent fall was so bad because an interim low in Aug 2007 was never tested (chart below). As Mark Twain once wrote, history may not repeat itself but it certainly rhymes.

Disclosures: None.

Comments

[CautiousInv...:]

Your remark about textbook bottoms is spot on.

Bottoms are less an event and more of a process in which a price is set and then tested or in which a price is continually challenged. The process usually takes place over a span of months and more often bottoms are reached on light volume, with investors capitulating through exhaustion rather than panic.

What all of this means is that if investors get in early they can easily see their gains wiped-out as the market probes for the true bottom. This why some analysts refer to the bottoming process as W shaped as opposed to V shaped.

Jan 07 05:28 AM

[sr9web:]

Good comments!


On Jan 07 05:28 AM CautiousInvestor wrote:

> Your remark about textbook bottoms is spot on.
>
> Bottoms are less an event and more of a process in which a price
> is set and then tested or in which a price is continually challenged.
> The process usually takes place over a span of months and more often
> bottoms are reached on light volume, with investors capitulating
> through exhaustion rather than panic.
>
> What all of this means is that if investors get in early they can
> easily see their gains wiped-out as the market probes for the true
> bottom. This why some analysts refer to the bottoming process as
> W shaped as opposed to V shaped.

Jan 07 07:22 AM

[damonmcalli...:]

Great article.

Even small investor participation is falling through the floor with their remaining reserves being parked in M1.

Jan 07 08:56 AM

[johnbee:]

So who is buying the market now since its up 20% from the November bottom?

Jan 07 11:11 AM

[Gedankonomist:]

Well, maybe you can use this "fluff piece" to cushion your fall.


On Jan 07 08:56 AM DamonMc wrote:

> Great article.
>
> Even small investor participation is falling through the floor with
> their remaining reserves being parked in M1.

Jan 08 03:02 PM