My observation of aspiring bears and fearful bulls is that a lot of investors seem to be waiting for the S&P to move to 1200 or possibly 1250 before initiating short positions or liquidating longs. There is this square minded, vanilla perception that since the markets have fallen at such a substantial pace that they must have an equally substantial bounce. There are circumstances where this type of thinking is warranted. This, however, is not one of them.
I have been saying for the past couple of weeks that the ferocity of this push down since the beginning of August has effectively broken the deception mechanism of the market. Participants in the financial markets will have a difficult time with this since every single investor out there is a contrarian. If what is obvious suddenly becomes obviously right instead of wrong, then confusion will ensue. That is exactly what we have here.
What is obvious at present is that the markets are in a fairly serious downtrend. Fixed income markets and commodities are doing more than their fair share of confirming that the downtrend is very real. It is being led by financials and semiconductors. The same two sectors, by the way, that led the 2008 market debacle. These are all obvious facts. Don’t try to get fancy and bring in a dose of contrarianism. As I said, the deception mechanism in the markets is not functioning like it did in say June of this year when I said to buy the dip in the markets.
Put/call ratios, oscillators, sentiment surveys, volatility readings are all in a state of an expansion in their perceived normalized trading range. That means that the standard thought of XYZ indicator flashing a contrarian buy signal if it moves above 35 is in the process of being adjusted upward by 30-40 percent. Anomalous behavior now that is setting the stage for the evolution of what we see as being normal behavior in the markets.
We’re in a period of statistical anomalies. How many times over the past few weeks have you heard of moves in both indicators and the general market being the greatest of the past several decades? Nature seems to be in an uproar as well, with earthquakes in places that rarely experience them and hurricanes headed for regions that aren’t used to this type of event. A statistically anomalous period in every way possible.
Tomorrow should be interesting. Seats belts and barf bags are optional.