On August 20th, when the concern on the media was the liquidity crisis and the falling market I wrote to a good friend of mine “The move on the DIA since the bottom of 2002 looks parabolic. If we break the previous high we will be “on the other side of the curve” when things get really high very fast. I don’t think this is a fundamentally inspired move, rather speculative (i.e., bubble) perhaps based on increased liquidity injected by Central Banks, or perhaps based on the new rules for pricing options based on risk.”
Remember that on August 31 Bernanke said that there was not going to be a bailout for lenders or investors. Yet, statistical indicators seemed to point to a parabolic ascend of the Dow Jones if there was a breakout of the previous high. When I see an oddity like that in my mathematical model, I try to figure out what may produce it. One simple answer is “the oddity will not materialize”. Now, my model is just a statistical model and can only tell me as much (in other words, I have been wrong before).
What I do expect as we approach the previous high is increased volatility. Also increased press noise. I call press noise to the incessant buzz you hear at crucial junctures in the market.
They way it works in general, is the following. The market operators who are betting for a breakout based on their own models will feed the press with gloom and doom ideas. Since their goal is to acquire as much stock at the lowest possible price, whenever asked they will mention only the negative aspects of their scenario. Eager journalists, and bloggers, take this news and, if they fit their own mental economic model, publish it as a revealed truth (after all, we all love a scoop). After all, at a juncture, you have only a 50% chance to be wrong.
On the other hand, the market operators who are betting the market will correct, will feed the media with the opposite view, a rosy picture where everything is going to be perfect forever. Of course, their goal, based on their model, is to sell as high as possible before and during the correction. So, get ready to read predictions of nasty crashes and wonderful new economies.
In other words, during those periods of increased buzz, political and market operators start using the media to manipulate the markets and the small investors. The tools are old as the markets itself, the reason basic as human biology (namely, greed and fear).
Where are we now
The next month should be interesting to watch, as October is an infamous month on the stock market and most market analysis seem to focus on some “mysterious” forces nobody can understand. The scenarios I see with more probability are:
- Double top in October, nasty correction, Fed bailout, break out in November
- Double top in October, nasty correction, more bad news in Black Wednesday, Fed lets the correction run its course and bails out in January
- Realization by the market that there may be a recession going on, bear market that can’t be stop by the Fed
- Break out in October happy sailing
This article is part of the series "Exercise in Market Timing"
- Expect increased volatility
- And we got increased volatility
- Bad News For the Dow (Short Term Bear Fest)
- Dow Jones 400 to 600 more points of pain
- After exiting two weeks the Dow Jones goes nowhere
- Dow Jones at 13,300.02
- Dow Jones at 13,099 should see a rest
- Dow Jones Finds A Convoluted Way to Do Nothing
- Dow Jones Ready for Next Leg Down
- Dow Jones 13,252. Not All Clear Yet
- Dow Jones: Announced 2-day Pullback Over
- Timing The October High And November Bottom Of Dow Jones
Franklin @ October 1, 2007