Market Diary 1-17-08
The bears are in charge, folks.
Yesterday the market was at a turning point. It could have rallied, maybe, if the latest economic statistics had been better, or if Fed chairman Bernanke had said something different in his speech today. But it didn’t work out that way. Instead we got a crash that was almost as big on the Dow as the Shanghai Surprise of Feb 28 of last year.
I got out of some of my bearish positions yesterday, so today’s crash wasn’t nearly as much fun for me as it might have been. And were I a less experienced trader I would have been torturing myself all day or all week over the money that I might have made. But after doing this for a year and a half, I’m better at accepting that many of the market’s movements shouldn’t be played, because from the perspective of the day before that movement wasn’t sufficiently likely.
It’s like playing craps. Some of the bets on the table offer low payoffs but good odds, and those are usually the best bets. But most craps tables also have higher paying bets with lower odds. The human brain naturally overperceives the high payoffs and underperceives the low odds, so those bets are more tempting to suckers.
But every so often a sucker wins. He places a bet that wasn’t a good idea, but then he gets lucky and wins. And it’s silly to wish that you could have been that sucker, placing a foolish bet and getting lucky. A foolish bet is still a foolish bet, even though suckers sometimes win them. In fact it’s those occasional wins on bad bets that keep the money rolling into Las Vegas. That’s why they keep building all those hotels. The emotional impact of seeing someone win overwhelms the logical perception of a bad bet. Most people would rather be lucky than right, and in the long run, they always lose.
Yesterday the Dow and SPX were giving reversal candlestick patterns, and were sitting at support. And we had major news events the next day. That was no time to be placing big bearish bets. Somebody else bought my puts when I closed out, and I’m sure that they had a great day today. But even though they won, they still placed a lousy bet.
The indices still have support levels to watch out for, but it’s complicated because they’re different levels. With the Dow, the number to watch is 12,000, which is where it bottomed out in March of last year.
The SPX doesn’t have as clear a floor. 1325 was the end of a bull market back in May 2006, so maybe that will be a floor, or maybe 1275 or 1225.
The RUT’s nearest floor is ten points down at 760, which was the bottom of the crash in May and June of 2006.
The Nasdaq 100 index (NDX) is just touching a major support level at 1850, which was the turning point for two highs and a low in the past two years.
So the larger market looks like it’s going to fragment even further, which makes me think of going more into individual companies. In the past when the market has been more unified, individual companies have been dangerous plays because the motion of a single stock was easily overpowered by the motion of the larger market. But if the indexes start moving in different directions, then maybe the technical characteristics of a single stock will play a larger role in its movement.
Disclaimer: Do not invest money in the stock market. Keep it in your mattress, where it will shrink away steadily at the inflation rate, which was 4% last year, and will likely be much higher this year. If you decide to put real money into the market, then big mean men (hopefully including myself) will take your money without any trace of regret.