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The Iceberg Market Analogy

While the precise mathematical proportions of your average floating iceberg may not exactly apply to today's market, just keep in mind the basic concept of, what you can easily see above the water is certainly much less, than whatever can't be so easily seen below the water. What I'm referring to is the copious amounts of money still frozen on the side lines, controlled by some people with very warm hearts,but also very cold feet. That is to say, they would love to have all of their cash stash fully invested in the markets, but their own level of fear will not allow them to do so, except very slowly and at a one person at a time tempo.

It reminds me somewhat of a portfolio manager many years ago, who one day announced to the entire investing world, that now that the emerging markets had bounced back about 60% after a huge sell off, it was now once again "safe" to enter these very risky markets.This is just an example of how many people think, and this vast amount of sideline money has only been trickling very slowly into the markets this past summer and fall. The markets still aren't "safe" enough for them. But, as the market indexes continue to rise, they are slowly becoming more and more "safe" to invest in, or so the common thinking goes.

David Fry, rightly enough the most followed contributor to SA, has repeatedly pointed out through his clever use of charts and folksy commentary, many of the odd characteristics of this on going market rally. One of them is the relatively low volume on most of the up days, combined with the relatively high volume on some of the big down days. According to generally accepted market theory, such a combination can only spell disaster just a little bit further on down the road a piece. Yet, this market behavior has been going on and on for the past four months or so, kind of like that old energizer bunny, that so many people seem to love to hate.

One reason for this odd pattern of volume , as David has also repeatedly pointed out, is the re-surfacing of that old 90's habit of buying on all the dips. The question is......Who is doing all the buying? While not being able to prove it so well, it is my firm conviction, that a good portion of this buying is the newly thawed out money coming in from the frozen sidelines, as some previously cold footed investors start warming up and feeling more and more "safe" about investing again ,as the market indexes slowly move relentlessly higher. Does anyone out there have some cold statistics and hard facts about these alleged cash movements to share with the rest of us?

Is it possible that there is a certain mathematical relationship between the market correction % and the following inflow of new money buying into the dips? Like the greater the market correction, the greater the inflow of new money. If so, then that seems like the best insurance policy, that an investor could possibly hope for. While this  might sound like just another variation of the greater fool theory, it's important to remember that this market is still not presently dominated by fools, as foolish as that might sound to some people. It's still completely dominated by fear. Remember the low volumes? That's the proof, that most investors still aren't participating very much.

I can easily give you about 101 sound reasons, why this present market activity is not sustainable over time. But, there is no reason for me to do so, as no less than 1001 articles at SA, seem to have gotten that angle covered pretty darn well (ahem). What happens though, if you put all those 101 reasons and all the fancy facts and figures backing them up on one side of the scale, and all the frozen sideline money on the other. Which side of the scale goes up, and which side goes down? If you can figure that one out, then you will know which way the markets will most likely be heading in the near future.

Over the past four months or so, and that's the past, the sideline money has clearly weighed heavier as the markets drifted, but not shot, higher. So, this is the present ongoing status quo, like it or not. This will obviously continue.....until it doesn't. Gee, how profound can you get? It's a question of when it all changes, as always. However, what is necessary to de-rail this market train is some very serious news, that not only scares most of the old money out of the markets, but also prevents all the new money from buying in on the dips. And what will that be, and when will it arrive? I'm sure there will be no shortage of guesses published here at SA on that issue!

There are some very valid reasons for the high level of fear these days. The apparent dislocation between the world of Wall Street and the world of Main Street is shocking, if not downright disgusting. It's quite historical or should I say quite hysterical? And, it makes me wonder at times, if we are possibly living on two different plants at one and the same time. If you are caught up in this kind of polarization, and think that it represents the only reality, then I'm not surprised if you think the markets are going to crash and burn quite soon.

But, has anyone considered that when 10.2 % of the work force is without jobs, that also means that 89.8% still have jobs. Some of these jobs are high paying jobs, and some of the people who have them also have their houses, cars, boats, planes,etc. more or less paid for. How nice, for them. They have a good cash flow in their lives, because they very simply, earn more then they spend. They're smart! So what happens to their excess stash of cash? A good portion of it ends up in their money market accounts, where it patiently waits to buy into the next coming dip, just like in days of yore.  Does anybody get this,yet?

It never ceases to amaze me, how limited the workings of the human mind (mine included) tend to be. It seems that although we all live in a very colorful world indeed, our minds seem to be hopelessly programmed for the almost inevitable black and white viewpoint. A case in point is the before mentioned dislocation of Wall Street and Main Street, as if that's all there is to it. What's missing is an understanding and acceptance of a third reality at the same time. And, that, of course, is all the money presently vegetating on the sidelines, and only increasing slightly more in value, than the few remaining vegetables left in last  summer's garden. When you also factor that in, then the last four month's of market activity certainly makes a lot more sense, then when you don't.

So in closing, and with full respect for dear old David, please don't let him FRY your hide in the same old way, that he once fried mine!!!