When Black Is Bright
When a market puts
in its biggest outing ever, you would expect some giveback the following
session.
We got that in Wednesday’s Naz, volume
drying, the range shrinking.
The giveback was not trivial, yet in
the face of such a gigantic move, totally within the realm of normalcy,
especially in the wake of a 51% drop in the index.
I.e. you must expect plenty of backing
and filling as an index attempts to stabilize after such a huge fall.
This differs from an 8%-12%
intermediate correction which can be more v-shaped.
Tens dropped from 5.43% to 5.32%, a
meaty one-day move.
The two best actors within the bells,
Tellabs
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past.
Elsewhere, the soggy action in much of
tech — Intel
(
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(
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-10% — is a reminder that with so much supply hanging overhead, don’t expect a
straight-up move.
In other words, respect the concept of
resistance.
I.e., for every seller on the way
down, there was a buyer.
Thus, there are a lot of people
sitting underwater on their positions that will now sell just to get
even…elementary TA, no doubt.
If you were around in the fall of ’90,
you remember that even though a rate-cut cycle was upon us, the averages didn’t
move up in a straight line.
There were plenty of twists and turns.
Enough to shake you out of positions
before January’s eruption in conjunction with the bombing of Iraq.
Translated: Buy stocks as they emerge
from sound bases, not when they are extended.
No matter how many rate cuts you
expect to occur and no matter how soft of a landing you expect.
For you will find, if you haven’t
already, that the market will test you in any way possible.
And as often as possible.
Hopefully, for you newer traders, the
experience of earlier this year — the false starts in many growth stocks —
taught you a great deal about risk and reward.
About how cheating, when
“caught,” exacts a price on your capital.
Otherwise, as an addendum to my
Tuesday comment about rates being more important than earnings, this is true, to
a point.
For example, an exception might be if
the economy got into such a serious recession that rate cuts would be tantamount
to pushing on a string.
In that case, earnings would, for a
period, take center stage.
But the good news is that the market,
as a bona fide discounting mechanism, will always look across the valley,
peaking when things look brightest and troughing when things look blackest.
Along these lines, the last recession
began in July ’90. Stocks bottomed Oct. 11, ’90, well ahead of the official
March ’91 end to the recession.
This is one of the many beauties of
letting the market tell its own story and never imposing your own will on it.
It is also a reason why you, as an
operator within the medium-term, should never become gloomy just because
everything else appears so.
Very black can become very bright.