ANTICIPATION VERSUS REACTION
*This is the weekly email sent to investors. I will publish this on the website from time to time.
There is no reason to deviate from something that has been working brilliantly well since the beginning of October. It has allowed me to look far smarter than I really am in anticipating and capturing a majority of this historic rally since October 4th. The correlation between the bottom and subsequent rally of 1998 and the current bottom/rally of 2011 continues to prove noteworthy.
The study confirmed that the second leg of the rally kicked off on Friday of last week. Also confirming that we would rally through this week. The second leg of the rally gained roughly 4.5% in 1998. For this week we have gained 3.8%.
The study tells us that we are about to embark on a sideways consolidation with a hint of weakness over the next week. In my experience with these studies, I have found that they are prone to breaking down during periods of market consolidation or pullbacks more than any other time.
There will come a time when this study stops working completely. The market cannot remain so highly correlated to any previous period for very long until it begins moving down a completely different path that forces us to search out a new road map for profit.
The last few days of the month have had a tendency to be strong during 2011. The month of October has not deviated from that path. The opposite is true, however, for the first few days of a new month. The tendency during 2011 has been to see the new month bring in the desire to take profits or further sell positions off. I don't expect November to deviate from that trend.
From a psychological standpoint, we have seen a significant change in the mentality of investors as the markets are beginning to force people away from their preconceived tendencies towards bearishness. What we have currently is a cautiously bullish outlook for the markets. This outlook has been created purely out of reactive behavior to prices rising. The markets often times punish reactive behavior. They will, however, reward anticipatory behavior.
Anticipatory behavior involves investors looking for points in the market when the lights are off, the room is dark and the only sound that can heard is that of frightening screams and terror. October 4th was one such instance. There was no perceived security in buying that point. In fact, it was the most frightening time of all. Anticipation of a bullish outcome in the face of absolute fear was indeed rewarded.
Reactive behavior involves investors looking for points in the market when all their friends are gathered around them singing the wonders and praise of what a warm, cozy environment they are blessed with. Feel good stories are exchanged around the fire while sipping hot chocolate from multicolored cups lined with gold. There is a sense of safety and security that takes place with camaraderie. It works well for football games and battles fought during war. However, it has no place in the financial markets. If you find yourself surrounded by company, odds are you that the floor is about to cave in beneath you.
Let's review:
1. The correlation study is pointing to a pullback beginning early this week
2. The first week of a new month has shown the tendency to be weak during 2011
3. Investor mentality has shifted significantly and there is now reactive buying taking place
All of these factors caused me to move to a 100% cash position on Friday. I have an eye on buying back into positions late in the week or possibly early during the following week depending on how the market reacts from here.
October was a very strong up month, there is no reason to sacrifice the gains ahead of a period where the odds favor a sideways market at best.
I hope all is well.
Regards,
Ali Meshkati
