I must admit the strength of the selloff yesterday surprised me. I expected the market would be down after the weak economic numbers, but the thing that threw me was the strong downside push at the end of the day. I expected more of what we have seen lately, slower selling or increased buying toward the end of the day. Once again, I am reminded that complacency about market behavior is not the mindset one needs in this environment.
So what happened yesterday? Why did the market react so strongly? Was it the ADP employment number of 38,000, the weaker than expected ISM number, Moody’s downgrade of Greece, a combination of all three, or just momentum selling sparked by fear? The reason I am thinking about this is that today’s market action seems to have returned to the “pattern” we have seen for some time now – vacillation between positive and negative with a slight bias to the downside. I question whether it will hold, though.
I must also admit that yesterday’s strong selloff has forced me to reconsider my near term “frame” for the market. As you know, I have suggested the market would behave relatively quietly for a bit, at least until some of the things muddying the waters clarified, such as the U.S. debt ceiling issue, the European debt issue, oil prices, etc. My new consideration is that fear might now become the driver of market movement, and when that happens, anything could happen, even a dramatic downturn taking us well below 1300 on the S&P 500.
The reason I now suspect this is the news reporting. Yesterday, as the market was tanking, the reporters and commentators changed. Like me, they moved from a sense of complacency to a sense of uh-oh, but the difference between them and me was their job. In other words, I watched calmly and thought about what was happening. I tried to understand what was going on objectively. They, on the other hand, seemed excited, as if the strong selloff was an opportunity to “shine.” It struck me as odd to see such a shift in demeanor, given how subdued everyone has been of late.
Suddenly, everyone was talking about a double-dip again. The interviewees were real bears. Some of the DIJA to 1000 doomsayers appeared again. All the topics focused on the negative, which is fine, but as we all know, people are people, and jumping on the bandwagon is easy, and the bandwagon was rolling through the heart of bear country. Everyone was jumping on. This was the beginning of the coming market collapse.
Admittedly, not everyone was behaving this way, but enough were to create the above impression in my mind, and if it affected me this way, then surely many others felt the same way. The point here is one I have made so many times, it is cliché – the market R us. The market is simply a representation of our collective consciousness, and if the perception is now shifting from one of “wait and see” to “get out quick,” then my guess is the market will retrace to a large degree.
As I write this, the market today has gone from vacillation to clear decline. It looks like another triple digit decline is on the way. I hope I am wrong, but my “sense” is that I am not. Often, perception is reality, and in the market, this is truer than just about anywhere else.
Trade in the day – Invest in your life …
