The Seduction of Numbers or the Scooby Do Rally

Yesterday was an amazing day in the market. Powerful, explosive! Was anything different yesterday in fundamentals than it was different two days ago? No. For the most part durable goods was weak. That everyone was in a lather for a Fed rate cut and anticipation a great wall of liquidity washing over the market always makes me laugh. Don't fight the fed is a mantra that some use, but others have said that the market has fallen X% of the time even when the Fed is cutting rates.

But market psychology in the short term always trumps fundamentals (galling isn't it!?)--whether the mood is manic (greed) or depressive (fear). None of this was lost on readers who left comments on the last post. Such moves are not indicative of a healthy market, but rather an emotional market. My little book "The Psychology of the Stock Market" helped me so much in understanding some of these basic market tenets. If you are mostly short, you're going to go into a buying frenzy that you saw yesterday. Watch charts from 9:30 to about 10:15. You often see stair stepped increases only to level off. I attribute that short covering--when it is in stocks (or overall positions) that are heavily shorted and some news catalyst causes a Scooby Do "Rut roh!" moment. So yesterday was a Scooby Do rally!

The lines in this chart had been drawn for a while. It's the Dow. I found it incredibly telling--and I do not believe that it is coincidence--that the lines turned back almost exactly at 13325.

But there is such a seduction in such moves. Fear of being left behind, particularly when your paycheck depends on your outperforming, is very powerful. You and I are not driven by that fear--if we are, we should reconsider, for it means we've been seduced. I think that one of the most powerful concepts is that no matter what the market, there are always opportunities. If you missed yesterday's move, there are going to be sectors and stocks in sectors that will allow you to participate. But, if you are merely and indexer, then that is not the case.

I like to draw lines in charts. I don't profess to be good at it, or an expert, but I get by. For the most part, they have served me well--guideposts if you will for when I'm getting ready to screw up (or get screwed!). I showed you this on FMD in this post. The stock actually went lower than that. Breaking support is a big thing. Just because a stock is at a support or resistance level doesn't mean that it will hold--but if it doesn't, money can be made (if piercing resistance) or lost (if breaking support) that one could have reasonable fair warning. I did unload my position at a loss. Had I hung on longer, it would have been much greater.

But fundamentals always win in the end. If we are going to slow down, the time tested business cycle rotation will always play out regardless of what the fed is or is not doing. I would consider myself underinvested, but that does not cause me any trouble. My retirement account is up 18.5% ytd. I'm 92% cash now. I'm fine with that. I'll be quick to say that I underperformed the market last year because I was expecting this action a year ago! Oh well.