Market Psyche

Posted by Jeff Carter
on June 8th, 2010

Yesterday’s market action was weird at best. Not data driven, the market traded in a tight range for much of the day, then it went lower. Bear markets are like that. So are bulls. In a bull market on a nothing day, the market will be range bound, then spike higher for no apparent reason. Bears spike lower.

I think fading that spike can be a good trade if you have the stomach for it.

It’s the beginning of summer trading. Summer trading can be very weird. In days past, not all the players were in the market at the same time. That is not true anymore. The players are little black boxes that never need a vacation. When one computer geek goes on vacation and can’t watch the box, another computer geek steps into their place. There is a lot going on in the world, and my guess is we will see a lot of volatility this summer. But I bet by September, the market will be around where its trading today.

A lot of people are calling for financial armageddon. I could see a big break in the market, maybe down to it’s March of 2009 lows. But, I don’t see financial panic.

Here is a good case to be a raving bear. The US government has a massive tax increase on the way in 2011, and it is a drag on the economy. There could be big problems with sovereign debt rollover, or a PIIGS country could default. Another country that surprises the market defaults, like this week with Hungary debt problems. World politics boils over in Iran or Korea, highly unlikely. A massive terror attack occurs in England or the US, more likely. The Republicans totally misplay the political game and the Democrats keep control of one or both houses of Congress (possible). The baby boomers decide enough is enough, and pull all their money out of the market.

Here is a good argument to be a bull. Everyone knows taxes are going up, they are already priced in. The Republicans take the House, and possibly the Senate providing a check to the anti-growth policies of the current administration. The Eurozone situation is fully known, and while difficult, is already priced in. Inflation remains in check, and interest rates don’t spike. The price of money for growth remains cheap. Money that has been sitting on the sidelines finds a home in the market somewhere. Big pools of cash are invested in short term treasuries at the moment. Fund managers remain risk averse, if they increase their risk appetite, the market goes up. Despite the efforts of a very bureaucratic government, business ignores it and finds ways to grow.

What’s the most important factor? Because since October of 2008, television cameras have been tuned to Washington DC committee rooms, the November mid terms could have the greatest bull/bear effect on the market. Republican sweep of both houses, big bull. Republican sweep of only the House, but Harry Reid losing, mild bull. If the Dems win it all, market won’t like it. The market likes checks and balances in government. Take the summer off, you’ll have a chance to buy the market at the same price that it trades at today.

The real tragedy in this whole mess is that we are more worried about capricious action in Washington DC, than what CFO’s are planning on doing with their companies capital. Make sure that when you vote for a candidate this year, regardless of political party, that they are for small, limited government, and that they realize governments cannot fix all the problems. Your portfolio will appreciate it.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

You might be interested in: