11/5/10 The Wall Of Worry

The last time I checked, which was around 350 pm est, the wall felt pretty solid. How many investors believe in this rally?

When inflows into equity funds reach the point where Ken Lewis sits in Santa's sleigh on the cover of Newsweek this December, then it's time to sell.

Why do I think the DJIA climbs higher into year end?

(a) The market has disallowed any easy entries, preferring to gap up overnight.

(b) The higher the DJIA climbs, the more skepticism I sense on the part of traders. (Whereas an index destined to move lower is usually accompanied by more bullishness.)

(c) At some point the psychology shifts from selling the rips to simply holding (ie, there is confidence that the market is headed much higher, and that any dips are temporary).

(d) Now that we're at the highs of the year, it's natural to think we go higher. Instead, everyone seems to think we're 'overbought' and topping. To use one of Vad's examples, how many times did traders hit the 'overbought' alert on QCOM before it finally started coming back down? The same dynamics can apply (in muted fashion) to indexes- it's the same crowd, after all.

(e) New highs also mean less resistance.

(f) As new highs begin to occur each day/week, investors are drawn in off the sidelines.

(g) The Black Swan newSubmitted by 2nd_ave (4919 comments) on Fri, 11/05/2010 - 20:15 #73642 (in reply to #73639)
I'm one of 'those people' (the phrase used to refer to anyone outside one's own universe) who believe everything happens for a reason.

Last winter I was privileged to witness yet another 'Black Swan' at the craps table (IMO the casino is the ultimate lab for studying the kind of crowd behavior that applies to trading)- an endless series of 'seven-outs' that cleared the table three times during the 2 hours I played. Players watched in disbelief as virtually NO pass line bets paid off in that period of time (and it's a fast-moving game). The dealers were shaking their heads and (at least appeared) blown away (no action, no tips). I made a deliberate decision to bet with the crowd as I sensed it would teach me a lesson I would not forget- I played until my playing capital was depleted. I left with a smile on face, however, as it became clear that black swans happen all the time! Shortly after that experience, I began stopping out of countertrend trades without a second thought.

The same image occurs now in reference to the rally off the August low. I don't think this rally stops anytime soon. I don't think we get a pullback that allows the majority to board. I think we continue to see gaps up that defy 'logic' (another little-understood and oft-misused word).

As always, I'm prepared to be wrong. But I have to go with the not-easily-misled take of the amygdala.