Surprise! Heart-Stopping Falls Lead to Breathtaking Rallies
Yesterday, I had the first and last quote in neat NYT Business section article, Heart-Stopping Fall, Breathtaking Rally.
It has already generated a few email questions. The quotes are accurate, but before what I said gets further misunderstood, allow me to clarify what we were discussing.
No, I was not calling for yesterday’s sell off, nor do I know if the rally from the March bottom is over. It looks to be weakening, but whether that is the end of the run or merely a short term consolidation remains unknown at this time. As far as I can tell, the data is inconclusive at this moment.
The discussion I had with the reporter was in the context of what these kind of rallies mean. It was not a forecast or a specific market call; Rather, I was waxing philosophically about historical patterns and collective sentiment.
There were two quotes in question. The first quote was:
“There are long, long periods of time when the market and the economy go two different ways,” said Barry Ritholtz, a professional investor and author of “Bailout Nation,” a book about the causes of the financial crisis. “A rallying market doesn’t necessarily mean the economy is healing.”
That’s been shown to be true over and over again — the rallies during the 1966-82 period, the Nikkei Dow in the 1990s, the Nasdaq ’98-00 boom, the October 2002 lows, the September to March 09 collapse, and the move off of those lows in March. Oftentimes, markets are not doing a “random walk,” nor are they responding to future economic prospects, but rather are responding to the excesses (in both directions) of the immediate past.
The end quote was:
“Mr. Ritholtz said that just as investors were overly pessimistic in March, when stocks fell to their lowest level in more than a decade, they have become irrationally optimistic about the recovery.
“History tells us that this will end with a substantial correction,” he said.”
This is not a forecast that we are about to collapse; rather, it is a general statement about what happens when momentum goes too far in either direction. The markets can continue with an upward bias for some time before the inevitable denouement . . .
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Source:
Heart-Stopping Fall, Breathtaking Rally
VIKAS BAJAJ
NYT, December 30, 2009
http://www.nytimes.com/2009/12/31/business/31stox.html
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January 1st, 2010 at 12:16 pm
Make no mistake — our entire economy is built on a foundation of toothpicks (debt, ultimately financed by fiat currency) the number and extent of which we increase each day, for the simple reason that they are all we have left to “build” with. The structure is groaning under the weight of it all. There will be a collapse. It’s built in.
January 1st, 2010 at 12:16 pm
Oh, forgot to mention:
Happy New Year, everybody!
January 1st, 2010 at 12:18 pm
BR, you’ve had the big light shine on you and in your eyes a lot more than I never wish to happen to myself, but you must know that the bigger the pop the media gives you, the more you are skeet.
It’s all you can do to say as little as possible to not become fodder for a journalist’s artifice.
Admittedly I have it easy; wearing the night vision goggles of a professional observer is a constant reminder to avoid the direct hit from even a flashlight.
Happy New Year and keep up the great work.
January 1st, 2010 at 12:45 pm
Dear Leader’s resolution…
North Korea makes peace pledge in New Year column
http://www.cnn.com/2010/WORLD/asiapcf/01/01/nkorea.nuclear/index.html?eref=igoogle_cnn
Iranian Cleric/Oil guys resolution…
No mercy for opposition, Iran says
http://www.upi.com/Top_News/Special/2009/12/29/No-mercy-for-opposition-Iran-says/UPI-50301262115000/
Mousavi’s reolution…
Mousavi ‘ready to die’ for reform in Iran
http://news.bbc.co.uk/2/hi/middle_east/8436919.stm
January 1st, 2010 at 12:54 pm
BR: <i."There are long, long periods of time when the market and the economy go two different ways"
I’d venture to say that’s what has many of us confused. If you’re not a momentum trader, how the hell can you deal with a stock market that moves independently of the economy? In other words, what’s a fundamentalist supposed to do?
I guess this: Have a sense of where equities are “supposed” to be, and buy when prices are way below (e.g. March) and sell when prices are way up (now?). But that’s not easy to do, in addition to being stressful because you can’t – even for a year or two! – put your money in equities confident that they will follow a non-volatile/follows-the-economy trajectory. A fundamentalist is forced to act like a momentum player. Ugh.
And in the last 18 months we now have external non-market forces (e.g. the Fed) playing a substantial role. Just what we need, more factors to take into account.
Heaven help the person who tries to follow Graham and Dodd, in this environment.
January 1st, 2010 at 3:00 pm
First off,Happy New Year All!As for B.R.’s quote,it may not be a prediction right now.How thing’s play out,that may turn out to indeed make this a most interesting{prediction/comment}several week’s hence.I was amazed at the tape yesterday,slow, gradual decline around 2:45 or so,then almost methodical selling right into the close.Nothing out of the normal{for an everyday}in the market’s.New Year’s eve should have seen quiet/dull trade.I don’t know what start’s the stampede,but I can Guarantee one thing,when this crowded of a trade start’s to unwind,you will want to be some of the first through the liquidity door.Be careful out there…..
Jerry
January 1st, 2010 at 6:13 pm
@quiddity. . .
It’s a very challenging environment. As a fundamentalist, your notion to put money into equities when real data shows they are historically under valued, as in march, is the first step. Secondly, you have to ride the wave with a safety net in place via trailing stops. Also, it’s a good idea to invest in sound companies that pay dividends, for extra cash while balanced on the biggest wave so you don’t race towards an early grave.
January 1st, 2010 at 7:35 pm
Far out.
Happy New Year.
January 1st, 2010 at 9:17 pm
quiddity,
as a ‘fundamentals’-based trader, how can you, even, make this: “And in the last 18 months we now have external non-market forces (e.g. the Fed) playing a substantial role. Just what we need, more factors to take into account.”–statement?
seriously, at the very minimum, you take into account a ‘discount rate’, no?
what, in any ‘Economy’ so rigged, can be more ‘Fundamental’ than the Central Bank and the actions, thereof?
http://www.thefreedictionary.com/rigged
January 1st, 2010 at 10:06 pm
@quiddity: I think Buffett’s buyout of BNI was a signal saying batten down the hatches in whatever way is right for your style (not to forget he is the sort who does not shudder at momentary, double-digit percentage losses in sound companies).
@Jerry369: Not to read anything into yesterday’s late-day trade, nor to disagree with Barry’s view, but I quite agree with you on the risk of a trap door being sprung … the kind of thing where days on end circuit breakers are kicking in.
@BR: James Grant recently was quoted in New York Magazine saying, “the economy is basically a bouncing ball, which flies off the cement at roughly the same velocity it hit.” Something along the same lines you are suggesting I presume.
January 1st, 2010 at 10:09 pm
Based on the fundamentals, you would expect the stock market and the economy to move in opposite directions. When the economy is doing well, there are lots of investment opportunities, so there is no point in buying stocks, so the market goes down. After all, only 0.1% of the stock you purchase goes to actual investment. Usually, you are just buying out someone else. When the economy is doing poorly, there are not a lot of investment opportunities, so money flows into the stock market, and the market goes up.
I suppose it is possible to have a bull market and a boom economy, but only after the basic investment opportunities have been exhausted and the economy is running on steam.
January 1st, 2010 at 10:28 pm
RiskAverseAlert, would you kindly elaborate on your statement to quiddity?
January 3rd, 2010 at 8:36 pm
For as long as i can remember, bears have hung their hats on this ridiculous idea that investors won’t be able to get out of the market before it collapses, because the door will be too small to squeeze through when everyone rushes for the exit. Well, that sounds scary….until you spend 3 or 4 seconds thinking about it….and then you realize that it’s absolute nonsense.