Market's Schizophrenia

Sorry for the gap recently. I am back!
The markets continue their Schizophrenia. In the last post I had surmised that March had put in some sort of tradeable bottom. That strategy worked great all the way till Mid May. In my prior posts late last year and earlier this year, I had warned that if there is a second shoe, then there has to be a third and a fourth and more. Well the sound of the falling knife is really the sound of those remaining shoes dropping, with most of the bad news coming from financials. As a result, the worst performing sector this year has been financials followed by housing. As a trader it is my job to identify opportunities where we can still make money with an in and out strategy, but as a long term investor I continue to remain on the sidelines as I had surmised back in January.

Right now my trading bets are small with extreme precision. I am not casting a big wide net because the market fluctuations and less capital don't allow that kind of luxury at least for now. But hey..when did that stop us?

Here is something interesting that I discovered while perusing Google trends. Google trends is a tool publicly available to see how hot is a given search word or a phrase. I put in the words "Stock Markets" in this tool and I got the below chart.


Notice the spikes closely related to the big plunges in the market. For example C is right around the Jan 22 bottom and D is right around the March 17 bottom. I wouldn't call it a 100% reliable indicator but it sure gives an idea of investor sentiment. The bigger the spike, the bigger the fear/concern and hence more chances the market may put some kind of a bottom. Lets see when the next spike comes in.

Speaking of plunges, this coming week is interesting. Expect a blood bath this week possibly earlier than later, but also expect some big swings on the upside as well. You are smiling if you are a day trader. You are cursing if you are an investor or a position trader. Either way, we will keep treading the markets carefully. So caution is still the name of the game. Will send out picks if I pick any interesting scan. But this is it for now. I am glad to be back.

Krish Rathi

(Update to the above post: I got a comment from an "anonymous" reader that my use of the term "Schizophrenia" that seem to imply I was disregarding the real definition of the term and may have been indifferent to the real plight. He also said "two identities" is not a symptom of Schizophrenia, which is what he thinks I was implying in the post above. First off, I apologize if my usage of the term has upset anyone. I have used it pretty much as a metaphor as English speaking journalists the world over use it to describe fairly different situations. I could have done a better job to describe the context. Let me take another shot. My context here refers to that particular symptom of schizophrenia which deals with perceptions of reality that are strikingly different from the reality seen and shared by others around them. Living in a world distorted by hallucinations and delusions, schizophrenia induces fright, anxiety and confusion. In that regards, I feel the markets has come close to demonstrating these features. First off, the credit crisis was completely underplayed, underestimated and as the shoes kept dropping, the markets have panicked when reality collided with the perceived view back in October and even in January, times when the prevailing notion was that all the skeletons are out of the closet, only to be met by surprises. Not only that, every day the economic data gets even superficially better, the market is very eager to forget the underlying bad news and rally on things like a revered talking head thinking we have reached the bottom of a particular sector, the government officials talking up the dollar, so on and so forth. Next day, reality kicks in with some bitter news about a bank restating their write downs, and the market dives down making you wonder why did it even went up in the first place. This to me does sound like a case of living in hallucination with all due respects. I certainly recognize the seriousness of the disease and don't wish to belittle its gravity. Its a metaphor in this context pretty much like "bastardization". I thank the anonymous reader for giving me this opportunity to research more on this disease, clarify and I hope he understands my intention.)