After the shellacking of the past two sessions, the stock market stands within hailing distance of the August lows.
It’s hard to know what’s more remarkable: the naiveté of investors who drove stocks up five days in a row last week, thinking China and Brazil would bail out Europe, or the panicky, run-for-the-hills urge that has knocked the market down four days in a row (so far) this week. Was the Federal Reserve’s assessment of the economy Wednesday (“significant downside risks”) any bleaker than what we all knew anyway?
By now, it should be obvious that the financial markets are being jerked around by emotion, rather than reason, to an extent unprecedented in my lifetime. Hopes and fears have replaced calculation.
This behavior creates dangers, of course — the greatest being what’s called “herding,” the tendency of the crowd to stampede off in one direction or the other. However, there are opportunities, too, for the cool, calculating investor who can think on his or her own, apart from the herd.
That’s why I lay such stress on my technical indicators. They provide a valuable reality check when the barrage of financial news and commentary seems confusing or overwhelming.
Right now, my gauges are sending two separate messages, both of which I believe are worth heeding.
The longer-term indicators, which look at the world from 30,000 feet aloft, are saying we’ve probably passed the peak for the current stock market cycle (1,363 on the S&P 500, April 29). Don’t expect to see that level again in 2011 or, most likely, 2012 either.
On the other hand, the medium-term gauges, which foreshadow the market’s path during the next two to four months, suggest that an important market bottom will form by early October. We can then expect a powerful bounce during the fourth quarter before stocks begin to erode again in 2012.