Monday, March 03, 2008

We Are Bearish

Top Line: Here we are, the first trading day of the month, and the stock market had some trouble. Looking back to last week's "successful" test of 12,750 we have gone down about 600 points, near 5% before the final hour's 100 point rally into the close. With a little more rally on Tuesday, or not, we think the next move down should be decisive.

There was news on Monday but we are going to focus this brief post on one item, the near term downtrend that we see.

For those who follow the stock market, there is a tendency to feel good when your positions are moving in the right direction. As stocks rally, you seem to follow your Wealth more closely. Then when the market turns against you, the tendency is to start avoiding the daily check on your stocks.

This reaction is very common and results in poor performance in the market due to lack of action. If there was some way to actually pull the trigger, many dollars would be saved. We have always been quick to sell our profitable trades and usually before they have gone their distance, gold would be a primary example. We were in at $275 an ounce and out around $400 for a nice profit but today gold closed just under $1,000. We were right on the going in price and pulled the trigger early and then never got back in. No, we are not advising that right now, either.

What happens to most people is they don't really like to sell, ever. When their stocks are going up, they are happy and content to watch them going up. Then when they go down, they stop watching them hoping someday they will come back up to where they Were.

The main problem is that very few can actually sell at the Top. For the rest of us, selling into strength is just wrong because, you know prices are going to the moon. This is greed whispering in your ear, don't sell, we can make even more.

We are entering into a time when the other emotion, that being, fear, starts to get into the minds of the "investors". This emotion is driven by a lower selling price than one would like to take but as prices continue to march lower, people get scared that they're going into the abyss.

Fear is the emotion that allows a crash to occur. We are not saying that a crash is near, just that when fear shows up, it is possible. We don't really see a lot of fear right now. What we see is confidence that the next big move is up. We don't really believe that is true and we say that because bull markets do not wait for people to get on board before they go, they just go.

The current situation is one of confidence that the Fed can prevent the market from going down with rate cuts and the market has gone down enough already anyway. So, we had our opportunity to sell but now we have to hold because prices are about to rally.

These things are not true. The Fed can not stop the market from going down and the market can go down as much as it wants to. But, for most, the thinking process is not to sell at the top because there are further gains to be had. Instead of taking a nice profit, the stock they own turns around and creates fear in them when it goes down. Since there is no place to go but down, it must be time to sell. Human nature never changes.

But, back in reality, we think the current state is that the market is just now entering a long down trend that should last quite a while. There will be rallies like we have seen from the January lows but remember we are still down 2000 points from the October highs.

Trish--you have provided the perfect recipe for the stimulus package to be a Non-Stimulus package. We think the current thinking of the recipients of these rebate checks is to pay their utilities and rent. Some will have a little extra money to spend and they will, like you say. For the most part, we think people have Already purchased things and now need to pay the bill. And, along comes the rebate check and provides the funds to pay off the debt.

The only way the stimulus package will work is if a large majority of the recipients go and spend it on new items. Even then, it is only a short term blip in the spending habits and providers of these new items will not plan for this to continue so can not and will not build their employee base or anything else. It will fail to bring the desired results.

Speaking of failing there is One article of interest. This one could write our post tonight.

FSI: 71.99 (new low as the Horsemen were down on Monday)

Also, here is the Pic of the Day:

We had so many subtitles for this one with the favorite being... Olé


Trish said...

Thanks for the pic of the day! Cute!

Now to my Stock comments:
You wrote, "...(people) don't really like to sell, ever. When their stocks are going up, they are happy.... Then when they go down, they stop watching them HOPING SOMEDAY THEY WILL COME BACK UP to where they were." This is so true. I see this all around me here at work. (When did I get out of AGF stock? $79?). AGF stock is currently $46.69 dropping considerably most days, with little up swings. I lost money at getting out at $79, but much better than keeping it and it being at $46 today.

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