MARKET NOTES 9/18: by Woody Dorsey.
FINANCIAL CULTURE HAS CHANGED: I had forecast that the U.S. Equity Highs of 5/20, 6/22 and 7/20 were tracing out a Topping Process (a series of “Golden Halos.”) My profile for a, “Kill Zone” see here in August followed by Black Hole (Negative Price Magnets) Behavior argued for a Breakdown. This culminated in a “Crashy” event on 8/24. The recovery from there overtly ended yesterday. It is amazing how little attention is paid to Market Psychology! Markets always have an Irrational or, Emotional Component. That was highlighted again yesterday. Clearly, the FED does not even think it knows what it is doing. It is all part of the new Bull Market suggested below.
Nothing has changed in Human Behavior. We always and inevitably make mistakes in many ways and, perhaps most transparently, in Markets. The English economist A.C Pigou noted many decades ago: “Pessimistic Errors follow Optimistic Errors in an endless chain.” This Emotional component of the market is the least studied and least understood aspect of Financial Culture. The Sentiment “Lens” is the “Missing Link” in Markets. The Optimistic Expectations going into the FOMC were psychologically doomed to disappoint and indeed they did. Human Beings and of course by extension, Markets were confused. This Market Behavior fits well with my preferred price pattern.
Financial Culture has changed, as I surmised. But I am wary, and indeed it is unnecessary, to declare something as simplistic as a Bear Market is here. If indeed, this turns out to be a Bear Market, just as in every other market phase, it will not be seen for quite a while. Markets are a process and Pundits have a personal and professional bias to Deny the New and Cling to the prior Market paradigms.
THE NEW BULL MARKET: Is there a China Crisis? Is there a Central Banking Crisis? Is there a Currency Crisis? Is there a Climate Crisis? Is there a Migration Crisis? Are there Geopolitical Crises? Is there a Crisis in Capital Markets? Yes, Yes and, Yes. Crisis is the new Bull Market. Invest in it.
BLACK HOLES: (Negative Price Nodes) There has been a great deal of interest in the “Black Holes,” which I had forecast for this Fall. This is a market term which I invented to identity unusual but repetitive negative price events. We definitely witnessed classic “Black Hole” Behavior on 8/24 and 8/25. But, it is not just a simplistic prospect of Doom. Indicators always have to be interpreted. I had forecast a Black Hole for 10/13/14-see here which did produce an extreme Low and a Robust Rally. That was a setback in a Bull Market. One of my other price inventions is Trend Duration Analysis. The decline last October lasted for 19 trading days and, 19 days after the Low, stocks were already back at new highs. The recent Recovery lasted 18 days and did not even get close to making new Highs. This “tells” that stocks had plenty of time to demonstrate their “Bullishness,” but did not. This is one more clue that the “Market has Changed.”
However, once a “Crashy” event like the one on 8/24 occurs, it is unlikely to be repeat itself very soon. It does grabs our attention and we may be inclined to obsess on the price levels from that event but it is now actually just a historical Bench Mark.
TRADING THE TRADE: A key principle in all things, let alone markets, is to: “Know Thyself.” So, know who you are as a Trader or Investor and whatever you do, don’t attempt rationalize a “Big Picture, investment “Religion.” Trade the Reality of the Market. As History shows, “In the Long Run, we are all Dead.” The corollary may be, “In the Short Run, we all have many Market opportunities.” I have outlined the upcoming trading pattern and the market is confirming that short term Reality, regardless of what the Big Picture may or may not be!
MARKET REVIEW: The 94% Bullish Sentiment reading on 8/11 identified the 2105ish-see here as setting up the expected “Kill Zone.” I noted back on 8/20: “It is now seen that the Market Vibration has changed.” The Market Psyche did Change. The extreme sentiments of 0% and 1% bullish on 8/24 & 8/25 identified that Trading Low. The Recovery from there generated a series of 90+ Bullish readings over the last week. It is of note that the 9/9, 94% Sentiment High did signify a price high in the DAX. A High has been due but was not expected to accelerate until after the FOMC. A decline is underway and the expected downside timing profiles are operative. I had recently suggested that Some Areas of Some Markets in Some Countries may have bottomed on the 8/24 Price Extreme. Areas like Crude Oil and EEM are candidates for that. The interesting inference is that perhaps more Obscenely Easy Money and Geopoliticals may now be subtly tipping Commodities (note Gold) out of Bases and into the Beginnings of Real Bidding.
WHAT DEGREE OF DECLINE IS THIS? There were Black Holes(Negative Price Magnets) due this Fall but I had allowed that these indicants could result in a confusing Complex Compound Correction. The question remains: What Degree of Decline is this? No one knows. If the rally from 3/2009 is starting to be corrected, it will take some time to determine that. Meanwhile, there are wonderful timing opportunities to participate in. Avoid speculating on what cannot be known.
MARKET SUMMARY: Enjoy Market Reality. The truth is rarely revealed and is quickly cloaked by the Opinioning of those who assume they know something important to say in every way on every day. The Market has Changed but it is not Simple.
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