MORE BAD SIGNS FOR THE BULLS
This article also featured on Forbes
We are undergoing a dramatic shift in the parameters of what is seen as "normal" behavior in the financial markets. I don't believe that this is some kind of anomaly as most seem to think. But rather it is the reality of the current market environment.
The expansion in volatility. The perceived statistical anomalies taking place with market internals. The lack of reliability of various sentiment and technical indicators. Tell-tale signs of the markets maturing and evolving in order to effectively combat increasingly sophisticated participants. This ain't 1999 anymore sugar.
Abnormal has become the new normal. Statistical anomaly has become statistical probability. What has worked in the past is turned into roadkill in 2011. It's similar to you being the only sane guy in an insane asylum. Either you will go insane as a result of your environment or you will pretend like you are insane in order to survive the environment.
I have a habit of humanizing the markets. It helps me to deal with and get a better read on exactly what is going on. I like to see the market as an opponent that not only dislikes me, but would like to see a great deal of harm come my way in the most intolerable fashion possible.
It feels to me like the market has come to the point where it feels like the participants who are left in the marketplace have figured out its motives a little too well. Think about who the primary players are in 2011: We have large hedge funds. We have high frequency trading shops. We have large institutions like Goldman, Morgan etc. We have governments and sovereign wealth funds.
The tourists, stoners and thrill-seekers have left the resort. All that is left are the highly trained and highly motivated professionals versus the market and each other.
That leaves the markets with no choice but to behave in a highly erratic, anomalous fashion. When you have a dangerous beast that has been figured out and subsequently cornered, leaving it with few escape routes, there is a 100% chance that erratic, unorthodox and dangerous behavior is the next order of operation.
Take yesterday's move, as an example. In its infinite wisdom, the market knew that it had more downside ahead. What caused the spike up over the past several trading days was an imbalance or overabundance of sellers versus buyers. The market wanted to curb that imbalance as best possible before starting its next leg down.
The question for the market becomes how to best have the hunters that are pursuing it turn their backs so that it can make its escape? Nearly every trader and investor I knew of, myself included, was looking for the S&P 500 to move up to 1230-1240. That was the point where sellers were going to either lighten up or get short.
This becomes a big problem for the market. When there is an abundance of interest in a particular level and that interest is drawn to one direction of trading (in this case the bearish side) then the market will either:
A. Blow right through that level and punish those who were expecting the beast to be easy prey
or
B. Begin falling well before that level so that investors don't get the opportunity to take a stab at all
In yesterday's case, it was B. The fact that it was B is very telling as an investor. It tells you that the market was too weak to even consider scenario A. It didn't even come close to pulling off anything that resembled a serious squeeze or rinse of investors. That's a very bad sign for the bulls.
Another bad sign is the manner in which the markets gapped down and didn't even consider moving up all day. It means that there is a huge number of sellers above the market. The market doesn't want to open itself up to them. What does it do? It runs away. It runs away as quickly as possible so that it isn't made to feel any more violated at the hands of the bears.
I continue to believe that investors will face more pain in the weeks and months ahead. We are closer to the beginning of price erosion and wealth destruction than any conceivable end. Act accordingly.
