Friday, February 25, 2011

Markets finding their footing ...

The markets found their footing a bit yesterday after three days of selling.  The stabilization occurred in and around key moving averages (the 50 day on the NASDAQ and the 40 day on the S&P 500).  Two factors we noted during this recent run up still persist; investor fund flows continue to find their way into equity markets and anecdotal sentiment is still doubting and not embracing this rally.  That said measured sentiment also has moderated as seen in the chart below from the American Association of Individual Investors (AAII) which shows bulls have fallen from north of 60% to 36% as of yesterday.   Its’ hard to have big corrections when liquidity flows are in and sentiment remains skeptical. While logically it may make sense that the markets need to correct, I found out a long time ago and the hard way that markets don’t care what we think.  Rather it beats to its own drum and most times the obvious and logical trade is the wrong trade. 


Additionally markets only correct when trading successes seduce investors into thinking the game is easy and they have it all figured out.  This overconfidence lends itself to over commitment on the long side via leverage, until investors exhaust their buying power.  Markets don’t go down when everyone is sourcing for short trades or when the loudest voices in the crowd are the skeptics.  Moreover, it also takes persistent distribution to turn the tide from up to down, and other than Tuesday so far the sellers have only been a one act (one day) show.

This above are brief comments from our more expansive FusionIQ Mid Morning Comments ...

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