I believe the best way to understand the ebb and flow of the market is to view it as the interplay of fear and greed. Of course, economics are important, but I view human psychology as even more fundamental to the movements of the market.
Tonight fear has the upper hand. US markets have been down two days in a row, the Asian markets are down sharply as I write, even gold is slumping. Investors are looking at tomorrow’s markets with trepidation–do they really want to stay invested over the weekend? Is this is the long anticipated correction people have been predicting for months?
For the first time since the 18th of December, the S&P 500 has broken through the lower bound of its trendline. Over the last six months, this would be where I would jump in, but I think fear will spike up at least for another trading day or two. Fear has to subside a little bit before bargain hunters start jumping in. I’ll probably jump into USO first. If it drops to about 36 I’ll be ready to jump back in with a covered call.
S&P 500 trendline (SPY), click to enlarge
I updated my 2003-2004 compared to 2009-2010 chart for SPY/S&P500 with another week of data and adjusted the normalized volume scale so that I wasn’t chopping off the curve. While the absolute value of SPY is almost identical to what it was 6 years ago the volume is about a factor of 6 higher, so the volume curves are only significant from a shape standpoint, not absolute values. The relative shape of the volume curve is very similar to the 2003/2004 behaviors.
2003/2004 SPY compared to 2009/2010, Click to enlarge
If this correlation continues we will see an increase in volatility and volume and sideways price movement on the S&P 500.
I looked up some news from January 2004 and saw some interesting headlines:
Realtors Say Akron, Ohio-Area Home Sales Set Record.
Big difference here. High tech was in the tank but real estate was doing well. Money was flowing to “never lose money” real estate.
SEC Tightens Disclosure Rules for Mutual Fund Brokers in Wake of Scandals.
It was a bad time for the mutual funds industry.
Economic Pessimism Reigns in Walnut Creek, Calif., Area.
The California economy, at least the Bay Area, was in the tank–no change there.
Former Vice Chairman of Federal Reserve Predicts Continued Low Interest Rates.
The names change, but the problems remain the same…
Jan. 19 (2004)–WEST PALM BEACH, Fla. — As a former vice chairman of the Federal Reserve, Alan Blinder has a fair shot at predicting when Alan Greenspan will raise interest rates.
Blinder’s best guess: not until the moribund job market improves. He cited the “terrible” unemployment report of Jan. 9 as evidence that Greenspan will leave the federal funds rate alone for the foreseeable future.
Early last December I thought the S&P 500 had shifted from an upward trend line to a sideways trading –I was wrong. Things are clearly still on the long term trend line, the only difference being that the volatility has really dropped. Volume has been low–clearly a lot of people are on the sidelines, like me, waiting for a correction.
SPY Trendline, click to enlarge
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