Reply #1: WrapUp by Martin Goldberg

[ozymandius]

WALL OF LEGITIMATE WORRY

The major indices are showing technical weakness. In the meantime, the crowd has been lulled asleep by the last 2 years where it would have been premature to take bearish positions against the stock market. Seemingly every time the market moved toward an intermediate term important technical support level or key moving average, a sharp rally provided the market with a “save.” The market has also been relatively resilient from bad news and there has been no shortage of it. This has served to put many traders asleep. The action of the market itself seems to be the most meaningful cause of the market action. This is known as momentum.

With the market’s upward bias, seasonality and wives tales have been a good play from the bullish side and poor for bearish use. Examples follow. Remember the success of playing the year-end rallies but the failure of a New Year swoon in ‘06? “Sell in May and go away”? Bearish wives tale, will not work. “Three (interest rate hikes) steps and a stumble”? Bearish rule. Forget it – Won’t work. Santa Claus rally? Bullish. Works every time!

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So what is different this time? I will outline some of the factors contributing to the case for a short term end of this momentum driven market and a resumption of the secular bear market.

1. Technical Analysis. Never has the public been so involved in the technical aspects of the stock market. If the Nasdaq bubble has taught the public anything, it is the apparent usefulness of technical analysis. While the wild speculation in technology stocks of the 1990’s was driven largely on absurd profit projections, today’s wild speculation is largely technically driven. Moving averages and momentum are household words as illustrated by many commercials focusing on technical tools. If you listen to main stream Bloomberg radio for a half-hour, you are likely to hear a commercial for a school where you can “change your life” by learning to trade. Similarly, a Sunday channel surf around the basic cable is likely to reveal a tape set that can be purchased to teach you how to trade options for profit and fun. Although these examples are on the “lunatic fringe,” it does point to technical analysis as a growing and popular tool. Some professionals appear to be increasingly emphasizing technical analysis in their decision making process and investing in a manner that is not characteristic with their fundamental views. Think Cisco. While this is now a good way to make a point or two here or there in this trading range environment, are the true risks being considered appropriately? One of key components of technical analysis is the stop loss to limit the amount of money one can lose in a single position.

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