Grim Statistics

Mark Downie: bearer of unwanted news

—Urban Dictionary

My barber is suffering from a light case of having his favorite horse shot out from under him. Apple Computer is the nag in question, and all he can think about, I’m given to understand, is that the market is wrong. Other than that, he admits to being temporarily locked into a great company that has very recently been severely mispriced. Apparently, he will hold at least until the stock, now around $450, gets back to $700, where, he is sure, it rightfully belongs.

I didn’t want to say anything–he was the one with the razor in his hand–but when a stock suffers a sudden (less than 4 months) near 40% haircut, it is not the market that is going to be wrong. It is the bag holder, of which he is one. What’s more, he will soon be joined by other bag holders. At this time, the broad market is vulnerable to delivering to investors a performance aping APPL’s.

I don’t want to talk about this, but I have to. For the third time since the late nineties, the “long the market” trade has become exceedingly crowded. I noted at mid month that speculators in stocks and stock market futures bought the market at a record pace. Now comes the news that the little guy-the mutual fund investor-has, since last November, become a serious net buyer again after staying away during most of the corrective rally of the last three years.

What this means is that everyone is all in. This is the worst possible news. Draw a scalpel down the front of  the market’s chest, rip it open and sniff it’s innards. Putrid. Same condition of overvaluation and excessively positive sentiment as in 2000, and 2007. In both instances, the market was no good for a long time. In Elliott Wave terms, 2000 was the orthodox top. 2007 was the top of a corrective B wave, and the present top (if that’s what it is) is the ending of a corrective upmove within a C wave, Elliottspeak for there will be no place to hide when the C wave turns back down. Conditions like we have today marked important tops in the previous two periods. Why should this time be any different?

2013 S&P

The one constant in markets is that the majority of investors–and that includes many so-called savvy professionals–arrive at a decision to act at precisely the wrong time. The culprit is the human response to uncertainty, which is to hang back with the herd until the direction seems clear and then to dive in (or out). When that happens, the market reverses direction.

It is true that the market has, several times, rallied up past upside targets the analysts at Elliott Wave International have given. But that has not made the market any more attractive. Quite the contrary. It will be painful to witness, let alone experience, when social mood turns back down again.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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