Capitalogix

Market Commentary from October 24th, 2008

It has been another strong week for fear, greed and volatility.  Earnings season is here, and we are seeing large moves in both directions.

There continues to be unprecedented global cooperation in the wake of the financial crisis.  The world seems to understand that it has to "snooze" the alarms until after the US election. The French have asked for a series of global summits to deal with the global financial crisis, with the first to begin after the U.S. election — and the last and most important to be held after inauguration day.

Stratfor claims that this shows two things. The first is how flexible many international crises are. They can wait for changes in political leadership. The second is how important the United States remains. If the United States had lost its leadership role, French President Nicolas Sarkozy would not have gone to Washington to get the Americans to agree to a summit. The rest of the world could proceed by itself. Most likely, that isn’t going to happen. The Europeans and Asians meeting by themselves would not be in a position to make any decisions. For that, the Americans need to be there. And since the Americans won’t have a new leader until February, the world financial crisis will just have to wait until then. My point?  It would be prudent to expect fear, greed and volatility to continue.

Looking at this daily chart of markets for the past few weeks, I'm struck by this seeming randomness. It almost looks like there's no pattern.

It is as if Jackson Pollock threw paint on our trading monitor and we mistook it for a chart. This utter lack of pattern might be an incredibly clear statement by the market. It says: "Danger, there is no edge here."

The strange thing about markets, though, is that what doesn't make sense from one perspective - may make a lot of sense from another.  For example, here is a daily chart of the same S&P 500 Index, only showing a much longer window of time.

Hopefully that long-term support line (just below 800) holds.

Election Tools

With the election coming in less than two weeks, I wanted to share some of the election websites that I check for updated information about how the race is going.

The first website (called Five-Thirty-Eight.com) is graphically compelling, contains lots of updated information, and is done by someone whose primary job is communicating statistical information. The name comes from the number of electoral votes.

The second website (called Real Clear Politics) has a lot more news, and I like the summary showing how much of a lead each candidate has in contested states. Here's an example of that chart.

And, here is a link to the top-10 election tools on the web.

Weekly Commentary through October 17th, 2008

The markets gained some ground this week, at least from a point perspective. It's so tempting to want to believe that the worst is over because of some of the rallies we've seen since late last week.

It is possible that last week marked a major bottom. However the market is certainly not trading normally. So I'm not convinced.  The volatility we're seeing is unprecedented.

Just this past week we had days with 10% - 15% swings inside the day. In fact, over the past 10 days the Dow had intraday swings of almost 85% of its total point value. We also saw the largest single day loss in the S&P ever (9%) as well as one of the biggest gaining days ever. My point is simple, fear and greed are still operating in extreme levels.

Stress Metaphor and the Markets:

A lecturer, when explaining stress management to an audience, raised a glass of water and asked 'How heavy is this glass of water?' Answers called out ranged from 8 to 20 ounces. The lecturer replied, 'The absolute weight doesn't matter. It depends on how long you try to hold it.

'If I hold it for a minute, that's not a problem.
'If I hold it for an hour, I'll have an ache in my right arm.
'If I hold it for a day, you'll have to call an ambulance.

'In each case, it's the same weight; but the longer I hold it, the heavier it becomes.'

He continued, 'And that's the way it is with stress management. If we carry our burdens all the time, sooner or later, as the burden becomes increasingly heavy, we won't be able to carry on.'

'As with the glass of water, you have to put it down for a while and rest before holding it again. When we're refreshed, we can carry on with the burden.

How does this apply to the stress and the volatility hanging over the heads of market participants? The potential recovery is in a fragile state simply because people are stressed and tired; and I don't think it won't take much to trigger another bout of fear and greed.

Coping, and the Scary Times Success Manual

With the markets making new lows and volatility shaking investors out and in both directions, I thought this would be a good time to talk about coping with loss.

There are predictable stages in coping with loss. In general you can expect to go through anger, denial, bargaining, despair, and finally acceptance. The stages of grief are normal and to be expected.  Here is a link to a more detailed article about the stages of loss process.

Thought Patterns:

The past few weeks have been brutal. Many people I talked to recently are suffering from "I should have ...", or "if I would have ...", or "if I could have ..." thoughts. What do I mean?  For example,  I might think that things would be better:

• if I would have flattened exposure before the bail-out vote, or
• if I could have held that short a little longer.
  
  

The problem is that thoughts like those cannot affect the past.  They only create more stress and distraction.  They are a lens focused on loss, difficulties, past events, things that are missing, and what you don't want. Think of them as an unhealthy reflex that wastes energy, confidence and time.

Instead the goal is to move forward and feel better.  What follows is a good head-start.

From time to time, economic and political events make people anxious and fearful about their futures. This is one of those times.  In response to requests from their clients for insight on how to thrive when events seem to be beyond their control, Strategic Coach offers ten strategies for transforming negativity and unpredictability into opportunities for growth, progress, and achievement.

They call it the "Scary Times Success Manual", and what follows are some excerpts.  The link to the complete version is below.

Forget about your difficulties, focus on your progress.
Because of some changes, things may not be as easy as they once were. New difficulties can either defeat you or reveal new strengths. Your body's muscles always get stronger from working against resistance. The same is true for the "muscles" in your mind, your spirit, and your character. Treat this whole period of challenge as a time when you can make your greatest progress as a human being.

Forget about events, focus on your responses.
When things are going well, many people think they are actually in control of events. That's why they feel so defeated and depressed when things turn bad. They think they've lost some fundamental ability. The most consistently successful people in the world know they can't control events - but continually work toward greater control over their creative responses to events. Any period when things are uncertain is an excellent time to focus all of your attention and energies on being creatively responsive to all of the unpredictable events that lie ahead.

Forget about what's missing, focus on what's available.
When things change for the worse, many desirable resources are inevitably missing - including information, knowledge, tools, systems, personnel, and capabilities. These deficiencies can paralyze many people, who believe they can't make decisions and take action. A strategic response is to take advantage of every resource that is immediately available in order to achieve as many small results and make as much daily progress as possible. Work with every resource and opportunity at hand, and your confidence will continually grow.

Forget about your complaints, focus on your gratitude.
When times get tough, everyone has to make a fundamental decision: to complain or to be grateful. In an environment where negative sentiment is rampant, the consequences of this decision are much greater. Complaining only attracts negative thoughts and people. Gratitude, on the other hand, creates the opportunity for the best thinking, actions, and results to emerge. Focus on everything that you are grateful for, communicate this, and open yourself each day to the best possible consequences.

Click here to listen to Dan Sullivan present all ten "Scary Times" strategies.
Click here to download MP3 files or Click here to download a PDF version.

If We Have "Economic Allies", Who are our "Economic Enemies"?

Have you noticed how correlated and coordinated actions have been worldwide throughout this crisis? The concept of economic allies presupposes that we also have economic enemies. It's easy to construct a theory that countries like Russia and China are using financial markets to exert leverage in a nascent form of economic warfare.

It is also easy to construct a theory that says that we are the enemy ourselves. That human nature's fear and greed instincts and reflexes almost inevitably spiral into a cavalcade of horrors.

The butterfly effect theorizes that a butterfly flapping its wings in Beijing on one day can create or affect a rainstorm over Chicago a few days later.

Likewise in a world where there is so much global communication, and where automatic trading programs can respond to each other from anywhere on the globe, it's no wonder that market moves are getting bigger, faster, and more volatile.

Perhaps governments are cooperating and collaborating because of a collective recognition that a new form of protection is needed to dampen the increasing speed, size and leverage behind market moves?