Tuesday, January 18, 2011

It's A Mad, Mad, Mad, Mad Market

It is the best of times.  It is the worst of times.

There are a smattering of data points that suggest that the global financial and economic arenas are slowing making progress toward a legitmate recovery.  That doesn't exactly get us to the BEST of times, but by comparison to 2008, it's practically utopia.  We don't wake up every day to the news that some major company has gone bankrupt or some huge financial institution has become insolvent. 

Unfortunately, the smattering is nothing more than a smattering.  The vast, vast majority of data suggests that markets are at a top of significance akin to 2000 or 2007. 

Investors are convinced that it's the best of times.  When they do, the worst of times immediately follow.   Nothing compares to the madness of crowds at market extremes! http://markostake.blogspot.com/2010/12/psychology-of-investing-part-1.html and http://markostake.blogspot.com/2010/12/psychology-of-investing-part-2.html

According to Barron's weekly survey (http://online.barrons.com/public/page/9_0210-investorsentimentreadings.html), the crowd is as mad as a hatter.  Bullishness is at historically extreme low levels.  Only 19% of newsletter writers currently identify themselves as bears (http://www.market-harmonics.com/free-charts/sentiment/investors_intelligence.html).  Coincidentally, the identical readings were measured at the market peaks of 2000 and 2007.

Americans in general think it's just about the worst of times according to Gallup, with only 19% satisfied http://www.gallup.com/poll/145610/Satisfaction-Remains-Near-Month-Low.aspx.  This crowd seems quite sane to me.

The trading behavior of the markets itself are mad.  The last two trading days have been outright schizophrenic.  According to Yahoo Finance, as the indices were making new multi-year highs, and after a run of 7 straight weeks of advance, an unbelievable 4% of issues traded on Friday made new LOWS!  Huh?  Would someone pull the DSM-IV off the shelf and sit this market down on the couch?  Maybe hand it a Kleenex?  Prescribe it a boatload of psycho-tropic drugs?

NOT mad are investors in the commodity and precious metals arena.  Despite the massive runup in gold, silver and the companies that mine them in 2010, sentiment is anything BUT extreme.  According to Gold sentiment analyst Marc Hulbert, gold "fever" has fallen to very reasonable levels since October, as prices have remained in a trading range http://tradersnarrative.wordpress.com/2011/01/13/gold-sentiment-more-pessimistic-while-price-close-to-highs/.  This suggests that healthy skepticism remains and thus that any pause in the action is likely temporary, or that any correction in prices ought to be fairly mild. 

In this tale of two markets, investors have two choices:  Follow the crowd which is sometimes mad but nearly always wrong, or follow "Marko's Take", which is sometimes right, but nearly always mad.

Marko's Take

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