Thursday, March 01, 2007

E-Mails that Concern Me: The Market is Fine!

I've received a good dozen e-mails telling me that the worst is over, the panic was and still is a perfect time to buy (one reader told me he is going "all in" on margin) and that the 97 and 87 panics are examples we can use as reference. My guess is most of these e-mailers have been taking there cue from the talking heads on CNBC and print media. Here is why I don't buy it; the thesis that the worst is over.

1. This market is a new beast. In '87 and '97, we weren't dealing with the proliferation of hedge funds, ETFs, program trading, Internet trading (at least at it's current level), etc.

2. In both '87 and '97, there had been a decline leading up to the fall. This market is strikingly different in that it came out of nowhere, halting a sustained uptrend. There is still a lot more that could be worked off.

3. Markets that the economy has been relying on, such as the housing market, are on the brink of disaster.

4. The global economy is more important than ever, and so are commodities. What happens if China and India get hit so hard that the demand for commodities decreases?

5. Small sample size. Two panics are not enough to base a trading theory.

6. Margin. Margin. Margin.

These are just a few of the reasons I'm not jumping on the "all's clear" bandwagon. I'm not saying that the worst is not over. Maybe it is. However, I am saying that we need to wait and see how things unfold. Watch support and resistance. Until support and resistance levels are in place, we're just guessing. I know I sound like a broken record, but right now we've should be making either low risk trades or trades with small positions size (you can use bigger positions if you balance it with lower risk, a.ka. tighter stops). Go ahead and indulge yourself with a trade or two that supports your theory. I'm cool with that. In fact, I've got two trades on right now (QID and VLO). However, make sure to go about it in a prudent manner.

I know I may be coming off preachy. Sorry guys, but these e-mails freakin' scare me.

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