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On Friday, we discussed why we might be overdue for a short term bounce. That turned out to be accurate, with a modest bounce starting later in the day. If Futures are any indication, we are going to be continuing that move further today, the start of a holiday shortened week.

I rarely venture into these sorts of market calls, because a) I am unconcerned with trading over the course of days and weeks; 2) no one seems to be especially good at it.

When I discuss these shorter term moves, it is because I am interested in potential  indicia of a major change in trend. Otherwise, I try to keep my primary focus on quarters and years. Not coincidentally, that is the time horizon of our asset management clients.

Most of the commentary you will see today about the bounce will be Fiscal Cliff resolution related. Don’t believe it. The bounce is simply because markets became oversold enough that selling pressure temporarily exhausted itself enough to let stocks rise for a while. The old saw is no market moves in a straight line forever.

I find the much more interesting meta-question worth discussing: Why does it always seem that when markets become deeply oversold, politicians and the Fed seem to react? Are they closet technicians or is it something else?

Its something else: The most likely answer is that similar factors drive all these events simultaneously. Politicos note when markets are in a distressed phase; that shows up in all sorts of other psychological measures from Consumer Sentiment to Capex Spending and broad hiring trends. When markets go into freefall, politicians sit up and take notice. Even a milder correction of < 10% such as we have had recently adds pressure to public officials’ decision-making behavior.

No, Bernanke is not watching his Bloomberg concerned about the 200 day moving average, nor is he watching the DeMark indicators nor doing MACD studies. But the same sort of pain that leads investors to capitulate and puke up stocks is also at work on decision makers. We saw that at work in March 2009, when both groups overreacted to the market collapse. And we are seeing shades of that now, with the reaction (and over reaction) to this pullback.

Sometimes, it is how bottoms can be formed (March 2009) or how we can set the stage for at least a short term bounce (presently).

No one wants to lose money, no one wants to get fired, no one wants to ruin their career or reputation. An angry Mr. Market scares the bejeebus out of lots of people — and what we get from that are poor policy decisions, and even worse trading.

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Meta Questions as Friday’s Bounce Continues”

  1. PeterR says:

    AAPL at MA(322) and EMA(409) looks good. Only another 2008-ish Black Swan would negate this opportunity IMO, and of course that would sink all boats equally.

    Put an Apple in Santa’s stockings for the mantle?

  2. b_thunder says:

    ” Why does it always seem that when markets become deeply oversold, politicians and the Fed seem to react?”
    “…Bernanke is not watching his Bloomberg concerned about the 200 day moving average,”

    In this weekend’s article in WSJ, Taleb focuses most of the blame on Greenspan’s attempts to “smooth out” the business cycle. IMO Greenspan’s legacy is alive and well.

    As far as the rest of the government – with real wages dropping to the levels of the mid-70 and upside-down mortgages, the stock market/401k balance is the last remaining sign of “prosperity” that average folks can be tricked into believing. “Hey, look – your 401k has recovered to 2006 level!”… except the Joe Schmo has been making contributions for the last 6 years…

    Perhaps stock market is the last remaining economic lever? The Berannke/Paulson/Geithner/Obama bet everything on creating a self-fulfilling economic recovery driven by stock bubble that they though would make people spend… spend.. SPEND!!!! If they let the market collapse for the 3rd time in 12 years, their 6 year war to preserve the “Potemkin Village” will be lost. They are all in.

  3. Concerned Neighbour says:

    Allow me to modify a well-known internet meme to explain the current situation.

    1. Politicians sound optimistic.
    2. Markets surge.
    3. Repeat 1-2 indefinitely.
    4. Politicians eventually do nothing or kick the can.
    5. ???
    6. Profit!

  4. brokrbob1 says:

    Are technicians the only investors who puke up shares at the bottom? Oversold markets get everybody’s attention, for self-evident reasons, especially so soon after a generational (we hope) low like 2009. Even non-investors notice a quick 10% decline and think, “Uh oh, here we go again…”

  5. 4whatitsworth says:

    Will there be a bounce? Well we all want to be optimistic as a proof point I offer the re election of Obama which I call “the triumph of hope over experience”. Before I get blasted by the left I voted for Obama 4 years ago.

    The short term moves are interesting at the moment because I suspect most of us are standing at the exits prepared for a quick get away but not wanting overreact. It could be that the smart thing to do is to follow Obama hit the eject button and go to Thailand and contemplate all the hard decisions!

    Regarding short term market situations the one thing that puzzles me and I believe stabilizes the market is compliancy. Over the weekend I spoke to a few of my retired friends and there is a great sense of compliancy regarding the market they believe that the market has to go higher eventually. When I asked what made them think that they just say “It always has” which is not quite true.

    In any case I am now looking at my tax deferred accounts and wondering if I should stay or go.

    BR, do you have any data on what market % moves causes excessive buying or selling (15% move in a month etc..)

    Things I am thinking about at the Macro level..
    ->When I spend money I create jobs and actually end up paying more taxes. Example I built a second house that created jobs and increased my tax payments I also invest and the yield on the investments increase my tax payments. I will clearly have less money to spend. My question is will the lower middle class actually have more money to spend and will that spending create the same type virtuous cycle.

    -> Obama loves to say “I believe in all of the above” the effect of all of the above may be that our tax rates go up and our deductions are limited. In addition it may be that we have Obama care and the health premium is taxed. I can easily see a political model that increases the yield to the government.

    -> The United States was the leader of the world and we were proud of it now public opinion is that somehow we should not be leaders. I believe this will create a leadership vacuum and that will certainly be filled by someone.

    -> Is there some type of new industry that will drive the next economic up turn. Bio Technology?

  6. “Even non-investors notice a quick 10% decline and think, “Uh oh, here we go again…””

    Politicians notice the non-investors (or what I call the 401k investors). They use the S&P 500 Index like a sentiment indicator. We all know that politicians can’t take much pain so a 10% dip was enough for the president and congress to get together for a photo op with a statement that “all will be well”.