Post by Bozur on Oct 12, 2008 18:14:30 GMT -5
The Rubber Band Effect
Rubber Band
Although I don't normally turn on CNBC during the trading day, I made the mistake of doing so this morning. Frankly, I couldn't believe what I was hearing since so many people were making the call that we're near or at the bottom. Until today, I've pretty much isolated myself away from the media (which is what you have to do in highly emotionally driven markets) but I have to tell you that the hair on my neck raised when I heard those predictions.
Moreover, I spent some time this morning scanning some of the more popular financial websites and I'm seeing more of that same across the board. In fact, you even have "sell everything" Jim Cramer out this morning advising that "you must hold your nose and buy." As one who is looking to put cash to work amid the crash, I have to say that this wasn't exactly what I wanted to see on TV.
As difficult as it is to admit, at this point and time, we've seen absolutely no reason from the market itself to suggest that we're near or at a bottom. Every day this week we've come in with countless indicators suggesting that at least a bounce is imminent and everything that all of us have learned for many years clearly suggests so, but it simply hasn't materialized. Failure to rally here is important to both acknowledge and understand.
I've talked about this analogy before and I think it is more than appropriate to do so again. The market frequently operates like a rubber band. It gets too stretched (oversold or overbought) and we see a snap back. The more extreme the rubber band is stretched, the more extreme the subsequent bounce and sell off. We've seen this countless times over the years and have benefited tremendously from that as a result. In fact, I'd say that 90% of the money I've earned from the market in my career has been from positioning ahead of and playing these moves for all their worth.
The problem that we're dealing with now we've seen absolutely no significant snap back which now opens the door to the question that no one (even I) wants to face. Which is, to put it bluntly, has the rubber band (i.e. the market) finally been broken? And, if so, what does that mean for the future of the market and the economy?
To make the assumption that the market cannot break ever is making a giant leap of faith which is ok to do so long as you recognize the fact that you're making that leap all the same. In addition, to make the assumption that it will be a quick recovery to fix the rubber band (i.e. the market) is a tremendously tall assumption given what we're seeing right now. While I don't think that every company in America is going out of business and/or that we're at the first stage of the next Great Depression, the market itself hasn't told us anything different. At least not yet and, until that changes, we must at least recognize it.
Obviously, I don't have the answers, but I think I can at least identify the questions we should be asking ourselves during these darkest of days. Without the market proving that it can rally (even if only for just a day), how can we even start to say that a bottom is at hand unless we're simply making a leap of faith, based on experience, but not grounded by any evidence whatsoever?
www.thekirkreport.com/