I mentioned before that a couple of years ago I created the "trading/investing" bible for myself which is a 4000+ word document outlining all of the things I have learned and believe in when it comes to the markets. This document was forged not out of dogma or self righteousness but from experience and what has actually worked. One of things I wrote was this:
A bull market will not end due to 1 time external events such as a natural disaster, president assassination, or even terrorist attack. Therefore dips that occur as a result of these events during a bull market are good buying opportunities.
These 1 time events don't effect the longer term underpinnings of the overall economy. They tend to create ST disruptions but that's about it.
If you look at previous nuclear fallouts like Chernobyl and 3 Mile Island, the market responded with only a modest dip (not even 5%) which you can barely notice on the long term chart.
After 911 the economy in the US literally grinded to a halt for a few days and confidence was shaken badly, but it was temporary. The stock market ended up dropping as much a 15% but within 1.5 months those losses were all recovered even despite being in a bear market whereby the ultimate bottom occurred in the following year.
Remember Katrina back in 2005? Despite being the costliest natural disaster in US history, with heavy losses to insurance companies, the stock market impact was rather muted. The market had dropped about 5% for 2 months following Katrina and then ended up closing out the year over and above where the market traded prior to Katrina.
History is clear: disasters like we are seeing in Japan are NOT bull market killers. They create temporary panic and although the panic could last for more than 1 day, the market ends up fully recovering the losses in fairly short order. Had this occurred in October, I'm quite sure the market would have been able to shrug it off after a 1 or 2 day knee jerk sell-off. But given the massive run the market has had prior to this news you could probably argue that the market was already setting up for a correction/consolidation anyways and the Japan news simply expedited this process. This in addition to the other concerns already hamstringing the market makes it tricky to call here.
Considering the damage done in Japan and in Europe, today's damage to the US was rather mild and the recovery from the opening was encouraging because the put/call ratio closed quite high today showing heavy skepticism towards this semi-reversal. By no means does this suggest we're out of the woods but it's a good sign for the bulls that downside will be rather contained from here.
These are the types of situations which test your conviction and determines just how much of a believer in the bull case you are. It's easy to be a believer when the market has been going up week after week but what about now? I suspect today chased out a lot of weak holders.
One thing the market will do is expose your weaknesses. If you are ignorant and make decisions based upon data the market doesn't care about or useless indicators, you will get punished. If you don't believe enough in yourself or your convictions you will get punished by not making nearly as much money as you should have or getting shaken out near the end of a dip/correction. If you believe too much in yourself and your convictions the market will eventually humble you for being greedy, stubbornly dogmatic or arrogant. If you're bitter/biased you will not see the market for what it is and you will get punished. If you are disorganized and reckless (don't have guidelines/rules, don't plan your trades) you will get punished. If you are emotional and make snap decisions you will get punished.
You will definitely learn about yourself playing the market...try to keep the cost of this information at a minimum.
http://chartporn.org/2011/03/22/the-wonderful-work-of-karl-hartig/
ReplyDeleteInteresting charts. Check out the last one on Dow Jones. You were right that JFK assassination didn't even stop the bull market in the 60s but more of a buying opportunity.
yup....jkf getting shot was just noise. anything that has little or no sustainable impact on the economy won't matter to the market aside from a knee jerk dip. the only thing that kills a bull market has been greed coupled with tight monetary conditions i.e. an inverted yield curve. With most people still thinking we are in recesion along with a very steep yield curve, we are nowhere close to that point....of course there's gonna be lots of noise along the way i.e. dips, corrections and consolidations along the way to try to throw you off.
ReplyDeleteThe only time in the last 80 years or so that a bull market didn't end with an inverted yield curve was 1937 and that was because the government cut spending too sharply from a still fragile economy which was recovering from the depression. That's probably the biggest risk this market faces as there are pressures to cut spending, however, bernanke and the govt are aware of the mistake made in 1937 and so I don't think they will repeat them....but who knows for sure...