| Gar's Market Blog
Outlook for Tuesday-Wednesday
( 9-10 February 2010 )
Downtrend
Remains in Tact...Again
It appears
that the market downtrend remains
in full force, except in this
case, Monday's downslide defied
statistics. After closing higher
for the previous 17 Mondays
in a row, today would have marked
the 18th up Monday, but it didn't
pan out. This should indicate
that the downtrend is not only
in tact, it is stronger than
many of us suspected.
A better
question than "Why was
the market down?" would
be "Why has it been so
sky high?"
At
the beginning of this year,
a great number of stocks were
at lofty levels, grossly overbought,
and unsustainable. So, a 10%
(or more) correction has been
long overdue. I believe that
is what is finally materializing.
Curse
of the Pundit
The
recent downtrend---with probably
more downside---might beg the
question, "Where is the
bottom?" While choosing
a solid bottom is often easier
said than done, there is one
piece of the puzzle that you
should heed more than all others---the
pundits, and the Contrarian
Principle
The
principle is simple. When bulls
outnumber the bears, especially
when the outnumbering is significant,
the market is likely at a top.
In the reverse, when bears outnumber
the bulls, the market has hit
a bottom. This is another way
of saying that the market is
likely to move up when most
people think it will fall, or
visa versa.
I
used to believe that the Contrarian
Principle works because most
people are wrong about stocks
most of the time. And while
there is some truth to that
idea, I discovered that the
real reason the market runs
in "reverse" of popular
opinion is purely scientific.
The
way it works is as follows.
If the majority of people are
optimistic about the future
direction of the market, they
will have already
bought stocks in anticipation
of this move. But if they are
already "in," that
leaves no one but pessimists
who didn't buy anything. With
most people already in, the
market has nowhere to go but
DOWN.
The
same is true on the downside.
If most people want out, they
will get out, but since you
can't sell more shares than
you own, all the pessimists
are out of the market, leaving
nothing but optimists who will
drive it higher.
It
should be noted that the overriding
bullish or bearish sentiment
has nothing to do with the market's
current
direction. Rather, it is the
human sentiment from the "experts."
One thing I have noticed, again
and again, is that most analysts
remain bullish during market
corrections, and they will hold
onto their optimism all the
way to the bottom! In fact,
it isn't until most of them
capitulate and throw in the
towel that we have truly hit
a bottom. Hence, don't get tricked
into "false" Contrarianism
from the market action. Rather,
gauge the sentiment of the analysts,
and go contrary to whatever
their consensus is. You will
discover, more often than not,
that the market will go opposite
to prevailing wisdom.
Outlook
for Mid Week
As
mentioned earlier, the market's
downtrend remains in tact, so
look for an overall trend lower.
Of course, it won't fall in
a straight line (it never does),
but rather, there will be brief
bounces to the upside, as the
downward market will attract
"bargain hunters."
It is likely to attrack such
people all the way to the bottom
(again, the Contrarian Principle).
So in order to get a sustainable
reversal, wait for pessimist
to grow in abundance.
Sector
Watch
Last night,
I called for Precious Metals
to rally, but I may have been
premature. I was basing this
on both oversold conditions
as well as gold and silver becoming
"safe havens." For
tomorrow---and the day after---we
should motify this call to consider
the US dollar (which has been
on a roll). If the dollar begins
to correct, look for explosive
upside for gold and energy.
Should the dollar continue its
upward climb, look for gold
and the commodities to continue
grinding lower. I good symbol
to track for monitoring the
US dollar is UPP (US dollar
ETF).
Look
for Financials to continue underperforming
everything else, while Technology
might have the best chance for
a bounce---if all else is equal.
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