Thursday, August 11, 2011

When everyone is screaming that the the sky is falling!

Earlier today I posted a blog about market behavior and following your gut instincts (see below).   I wanted to follow up on this …

There is an interesting phenomena that happens in the market that I think my gut instinct picked up early this morning.  My morning routine usually starts with reading many, many newsletters and blogs from supposed ‘market gurus’.   It is an interesting thing to do, since as we all know most of them have no clue what the market is going to do and usually got their info from somewhere else anyway.  In any case, I certainly don’t trade based on these newsletters, but it helps me to understand the market psychology at that moment in time and what the masses are reading and digesting.

One thing I have found VERY interesting, is that there comes a time when everyone is SCREAMING to sell.  Everyone is bearish, and everyone is proclaiming that the end of the world is near.  And this is usually when I find the market starts to turn up.  I think this was the basis for my ‘gut feeling’ this morning.  I have seen it many times in the past … where my analysis doesn’t show strength yet, but the market psychology is shouting something to you.  If you think about it, it makes sense but is kind of hard to grasp … when the last bull has sold, then there are no more sellers and buying has to start soon.  When everyone is proclaiming that the sky is falling … that is the time to start investing in glass companies.

Now with that said, I don’t do anything if my analysis doesn’t concur, and as of last night’s close I was starting to see early signs, but nothing concrete yet.  After today’s stellar 4-5% rise, things are looking more rosy.   And what is one of the most telling signs is that the market spent the day being consistent, it steadily rose all day long every minute of the day.  No whipsaws, but a nice rise … it you drew a line under the prices during the day, it looked like a nice, straight 40% angle.  This consistent rise is very, very healthy showing that everyone was in agreement that the market should rise, and more so that there wasn’t irrational exuberance, just a consistent calm move up.

Are we out of the woods, absolutely not … as I said yesterday I expect us to see a retest of the lows in the coming weeks, but with each passing moment, I become more and more bullish.  If tomorrow’s open is still in line with what I am seeing tonight, I would expect that I will be starting to put money into the market again.  Slow and cautious at first.  As I said recently, the market generally meanders around the bottom after a strong fall like what we have had, so there is no massive rush to get in.  Timing your purchases around price dips usually serves you best. 

Although it would be nice to buy at the absolute bottom and sell at the absolute top, I’d prefer to buy when the odds look much more favorable and sell when they are not … as I said previously, this is a probability game, so I wait until the odds are in my favor, and scale my bets accordingly; the better the odds, the more aggressive I become.  Right now, caution is warranted, but the odds seem to be turning in our favor.

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