Reacting to the Market's Irrational Behavior

Includes: DIA, QQQ, SPY
by: The Other Street

When markets behave in an irrational fashion, it is impossible to pick a bottom, or a top for that matter. Fundamentals do not work, and technicals do not either. Only emotions rule, and margin clerks. Remember, at the worst of the July mini-crash, here were some of the doomsday quotes: “Panic is not widespread”, “somebody big is going to default”, “the ECB has to buy the whole 1.6 trillion euro in Italian debt, and France’s 1.7 trillion, and…”, “I don’t see blood in the streets”, “this is 1987”.

For some unknown reason, the S&P chose 1120 as a triple bottom. In yesterday’s article, I asked whether anybody knew why. I have a reasonably large audience, but no one came forth. Which tells me the 1120 low was put in by nobody else than "the invisible hand". Scary.

What I try to do in these times is wipe out the tails, either up or down. On the way up, I would top the S&P at 1340, and on the way down I would stop it at 1190. The 50% retracement target becomes 1265 – my two cents, a 1260-1280 trading range. For the record, we are at 1205.

Now, don’t get me wrong, I am not saying I am in the pink-colored glass camp. There are lots of very good reasons why the doomsday scenario is not completely off the table. I am just an observer - sometimes I anticipate, sometimes I react. What I am observing is that despite news which would have been deleterious in a worried market, i.e. yesterday’s dire Empire State Manufacturing Survey, the S&P not only managed to close above the magic number of 1190 (see my previous articles), but the euro maintained its gains versus the dollar, at 1.444 on the September futures.

I don’t think today’s meeting between Prince Charming and Princess Fiona will yield much. Shrek may have won the battle with quite unfitting characters, but Trichet is not Adamson. The Ogress (nice ogress) won’t marry the Prince (he has a handful). Because this is televised and very public, I expect a statement to the effect of “it only took us a few bags of gold to calm the fears of the masses”, to mean “only” 22 billion euros to bring down Italian and Spanish rates, the ECB is doing fine. Hey, that’s a fact. We must take it into consideration. Maybe the ECB does not have to buy the whole European sovereign debt? Indeed, has anybody ever ventured this crazy idea: Should the Fed buy all of the debt issued by Treasury? Get a grip, really!

Now, I mix it all up. We are at S&P 1205 and HYG $86.70. 1270 before 1120, anyone?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.