Market Anthropology: A Few Thoughts

Tuesday, November 29, 2011

A Few Thoughts

Never a dull moment here at the tip of the sword. 

I try and keep that it mind, in times like these, as inevitably we will work our way through the heightened volatility and emotionality that a market such as this feeds upon. If you don’t prepare yourselves for that transition – it will set like concrete around your ankles when you finally need to pivot. 

Those expecting the world to burn this time around will likely be disappointed once again as forecasts for Dow 4000 fade in the rearview mirror and into the annals of Prechtervisions. Then again, that would even be an outlier opinion towards those expecting the March 2009 lows to be revisited. So who knows, a fool one day a genius the next. 

Like I hear almost daily from both bulls and bears alike, it is different this time around – unique seems to be the consensus. And while that is certainly true, I do know that the ultimate driver of the markets, emotions, have been around for a while, or at least since the 1950’s when Buddy Holly donned his black rimmed specs and sang, “That Will Be The Day“. 

I kid, and I suppose on a long enough timeline, everything is possible – even the end of this experiment we call modern finance. Just don’t tell that to the data miners. They may enjoy an increase in business during an occasional 100 year storm, but a 500 year flood resets the scales in a way that would certainly be bad for business. The new colloquial, MF’d – comes to mind.

In any case, what I find myself thinking about most these days, when I’m not searching for emotional artifacts in the charts – is timeframes. Do we need to prepare ourselves for another year or more of stiff headwinds, or will the markets clear swiftly? As much as I enjoy a nice daytrade or weekend rental – inevitably this year long range will be broken. My work over the last month has overwhelmingly pointed towards a slouching equity market, a structurally challenged commodity sector and a fresh secular bull market in the dollar. In essence – another whiff of deflation.  And while domestically I look around and could argue quite convincingly that our own economy has been wrung dry of excess capacity, a problem inevitably arises when you think about what will restore it if Europe applies asymmetric austerity and China stumbles. 

There’s enough there to frighten even the most weathered market participants. It was interesting to read that one of the greats, Steve Leuthold, was buying – even though he was, “scared to death” of the market. I suppose if you are an investor with long enough timeframes (> than 2 years), it makes sense to layer into each respective sell-off. Just try not to chase performance and be prepared for a market climax that is similar to recent history (2002 & 2009) where the market swoons another 10 to 20 percent below the previous lows – before pivoting right back around. In 2009, the market started the year above 900, then quickly faded below 700 – before ending the year above 1100. All the while a cautious, but seasoned Steve – was buying. As I have stated in the past, I believe that this market is a delayed retest of the 2009 lows, although I suspect we will see a low considerably above 666. It is comforting and consistent to see Mr.Leuthold come back to the trough once again.

One overarching reflex since 2007 is the markets have maintained their considerable inertias as they have crossed this historic range. This year was more or less a microcosm, or fractal if you will – of this dynamic. In physics you might call it elastic collision. From Wikipedia:
An elastic collision is an encounter between two bodies in which the total kinetic energy of the two bodies after the encounter is equal to their total kinetic energy before the encounter. Elastic collisions occur only if there is no net conversion of kinetic energy into other forms.
You could argue it was Bernanke’s creativity/delusions with quantitative easing that has maintained the animal spirits within the system and diverged the market from comparisons to Japan or the Great Depression. But alas, that is an academic debate that needs considerable historical hindsights to gauge what the affects were to the economy. With that said, we are 80 years removed from the Great Depression and the idealogues on both sides of the aisle still can’t agree on what the appropriate policy response should have been… 

To make a long story short, like Mr. Leuthold, I will be buying equities for more than a weekend rental and likely in the first quarter of 2012. As an individual with the capacity to be nimble, I just want to see a healthier technical backdrop develop between now and then. 

I’ll let you know what I will be looking for in my next note.