7 replies to this topic

[A-ha]

Second highest during this period was seen in April 2000 after the initiation of the bear market. Interestingly, during the first sell off in March/April 2000, we had seen extreme down volume and breath trust days... like the ones we saw lately... So we have two high down / up volume and dec/adv issues days followed by a very high adv/dec issues and up volume day... i guess somethings never change. Maybe this similarities are coincidence but one thing I am sure, we wont wait too long to find out. We dont need to crash or fly to see what was all these about. Just watch the market moves from here, both upside and downside days. However , I believe there may be more upside this week as P/C stays high...

[snorkels4]

http://stockcharts.com/c-sc/sc?s=$NAUD&p=D&st=1999-01-01&en=2000-12-31&i=p54768432918&a=72878577&r=981.png

&disp=O]My Webpagehttp://stockcharts.com/c-sc/sc?s=$NAUD&p=D&st=2003-06-01&i=p29499809265&a=77356079&r=368.png

Edited by snorkels4, 06 March 2007 - 08:00 PM.

[dcengr]

As volatility increases both to the upside and downside, premium goes up for both sides. Thats what they want. Sad part is, leverage is so high right now, people are gonna feel some pain.

[A-ha]

Emphasizes what i am talking about... expanding range...gradually declining very low readings (increasing selling power) followed by gradually increasing very high readings (stronger corrective moves)... sign of increasing instability towards the top

[A-ha]

First Bernanke tried to talk the US markets up after the initial plunge, but didn't work...He focused on US economy, how strong blah blah... Market didn't give a heck... Then yesterday, vice president of PPT operations , Paulson went to japan and said global economy is very strong. Asian markets popped immediately, so was US markets. They may wanna try south america tomorrow

[SemiBizz]

I remember April 2000. Somebody said we'd never see those lows again in our lifetimes...



http://bigcharts.mar...&mocktick=1.gif

[A-ha]

I am taking a wild guess..

[snorkels4]

im sure this is old hat to you guys. but it tempers my bearishness


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Fear Breeds Opportunities

Last week's dip within a strong uptrend provided investors with an excellent time to buy. Fundamentally, there was no reason for the market to react as negatively as it did, but psychologically, the dip was a normal human reaction to fear. Now, fear is a much more powerful emotion than greed (as evidenced by the popularity of investment advisories bearish for the last two decades and who have missed out on the market's better than 1000% gain since 1987).

Fears which came to the surface, catalyzed by China's very reasonable attempt to quell an overheated stock market, included:

1. The US economy is facing a recession this year.

Journalists, known for being even more wrong about markets and the economy than even options traders, reported that Alan Greenspan had predicted a recession in 2007. Despite the fact that the report was false and that Alan Greenspan's record of predicting both busts and booms in the economy is atrocious, the story continued to be repeated every day and all week in newspapers across the country, quickly reaching the status of Urban Legend.

In the real world, there are no reliable indicators which point toward a recession in the US this year. Instead, they are pointing toward an economy picking up its growth rate to 3-3¼% from last year's 2% rate. At the same time, inflation is falling into the Fed's desired 1-2% range.

2. The Chinese economy is slowing drastically and, being the engine of worldwide economic growth, will pull the world's stock markets under.

This is demonstrably false since the Chinese government is simply protecting the market from getting into a position similar to the Japanese market of the 'Eighties: overvalued and prone to crashing. Eliminating "irrational exuberance" helps keep the market from inefficiencies of asset distribution and promotes the working of the free market. The US could take a lesson from the communists in this area.

3. The Yen-carry trade, where investors borrow money from Japanese banks at incredibly low rates and invest the money in other markets which pay much higher rates, will be unwound, causing massive selling pressure.

This fear is false as well since the Japanese loan rate is still incredibly low at just ½%. Currency adjustments do affect the yen-carry trade, but there is no reason to believe the USD will fall against the Japanese Yen over any reasonable time period unless the US goes into a recession or the Japanese economy goes into a boom. The chances of either of those events is essentially zero over the foreseeable future.

4. The growing malaise in the housing market, and most especially the so-called "sub-prime" market, will spread to the rest of the economy.

Again, the probability of the housing market bust leaking into the economy is almost zero. All reliable indicators show no sign of recession, which would be the only reason the housing bust could affect the overall market.

Now, one thing that is evident over time is that severe corrections are a bull market phenomenon. Bear markets tend to exhibit corrections as well, but there they are manifested as sharp rallies. In an overall uptrend, the rate of advance is generally fairly low and last a very long time, but the corrections against that uptrend tend to exhibit very high momentum. This is why the majority is usually wrong: the severity of corrections produces a corresponding fear reaction, causing the timid and weak investors to flee stocks for "safer" investments like money market funds or bonds, while the gentle advance in the major trend produces a much milder emotion: complacency (which is why trailing sell stop orders are used to take profits and to "refuel the account" for buying the dip).

One way to measure complacency is by use of the VIX index, which measures the implied volatility of S&P 500 index options. That measure soared 83% last week as short term traders rushed to buy a massive amount of puts. Before last week, that gauge had been hovering at the 10 level, a level which is historically very low. The sharp rise in VIX is very similar historically to the rise which occured in 1995, right at the beginning of the greatest bull market of the 20th Century. Investors suddenly realized that there is risk in the market and bid up the price of puts, doubling the value of VIX by the 8th of March. But, as we said, sharp corrections are a phenomenon of a rising market and this rising trend in VIX is actually a confirmation that the market may have entered a stronger trend to the upside. The dip is just the market's way of redistributing shares from the weak hands who are easily scared out of their positions into strong hands who recognize opportunity when it comes knocking.

The weak hands tend to fall into a trap of believing that a rising VIX is a sign of a bear market. A look back at market history shows that short term corrections indeed associated with a rising VIX as that strong emotion, fear, bids up puts. But, when viewed with a longer term perspective, a slowly-rising trend in VIX during the latter half of the 'Nineties was clearly a hallmark of a strong bull market.

A correction within an ongoing uptrend provides investors with an excellent opportunity to take profits, then buy back in for the resumption of the uptrend, which could come as early as this week.

Friday's market retested the week's lows. For the week, the market definitely shook the weak hands out: