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Fear will Drive the Markets, but WHICH is the GREATEST fear??



May 06, 2009 – Comments (3) | RELATED TICKERS: F , EAR.DL2

 The VIX, (volatility index), is often said to be an indicator of FEAR.  I agree, but which kind of fear?  The market can be driven by three kinds and each has had a turn of late. Two typically drive the markets down and one of the three up.  Which fear is in play?

1. THE FEAR of LOSSING (MONEY):  This was the fear that set the two troughs, one in November and one in early March.  When people can't "take anymore” they run.  The flight to safety is primeval. Whether it's a sport, love, or money, we don't like to lose. When the fear is at the greatest those who have sold out are crying about what they lost. Those who have not sold have settled in for whatever they are dealt and try to make it work, or at least they are learning and living along the way or have their head in the sand,  (sport, love or money).

2. The FEAR of MISSING OUT:   The Fear of Missing has driven the market upward the past few weeks. At first it was thought we were in a bear market rally off the bottoms. Then most Analysts, most Fundamentalists, and most Technical Analysts began expecting a correction back downward.Now, there is a vast divide growing over whether we are in a bear market rally or a bull market.

 Many analysts are starting to say that banks could be a buy, the market could keep going up a "little more" or we could move sideways for months.  Fewer are predicting a serious correction.I believe this is being driven by the fear of Missing Out. It's evidenced in the share prices of many stocks sub $10 and very definitive on those below $2 that were once $15 to $30 stocks at their 52 week high. It's also evidenced in the markets ability to shrug off earnings if they were anywhere near analysts expectations.  It doesn't matter that the bar on the expectations was set exceedingly low.  Finally it is evidenced in any news being interpreted as “good”.Changes in job loses, housing starts, the Chinese blowing their noses, etc, can all drive it upward.

3. The FEAR of the UNKNOWN:  This fear is ALSO in our DNA.  WE have dealt with it several times the last few months and it is usually caused by our well meaning, uneducated, clueless, etc, government.  Changing leaders, changing songs, changing rules, talking out of both ends, etc, all compound this. The "mysterious stress test" is the next iteration of this. The government was not going to publicize the results of  this fiasco because they didn't want to cause fear.  In reality, they can't explain their metrics.  They have different yardsticks for different banks and for themselves.  They predict their budget deficit based on a recovery at end of year, yet they figure the banks risk by worse case scenarios that can last up to two years. Now they have no plans to enforce the findings. Banks will be given six months to "correct" their perceived deficiencies.  In six months, the metrics will change again and nothing will be enforced.

 Which fear will rule the day?

  1.   The Fear of the Unknown is temporary, but can set a cycle in motion that triggers the fear of losing.  In the case of the bank stress test, the market appears to be shrugging it off and we could get a relief rally as we have in the past when the government indicated that all their posturing was BS. 

2.  The fear of losing only applies when a large percent of the herd follows the leaders over the cliff. There have been two cycles of people losing and sitting on the side, then missing out. I think that with the new highs, new money, stocks hitting 50 and 200 dma's that a fall will not be too sharp. It would be more apparent in the small dollar stocks that the fear of missing out folks are piling onto, based on a recovery that is unrealistic.

3. This leaves the fear of missing out.  While it is the least strong of the three fears, I think it will win the day.  I'm being told by several analysts and TA's that I follow to go short. So far I'm not listening too well.  My gains are back in riding the irrational rises of the very small dollar stocks. I have seen that those that bottom once are less likely to bottom twice if enough shares trade hands at the higher dollar value. I have also seen that the stocks most beaten down have the most short interest.  IF the stock stays up then the covering will drive the stock even higher, (artificially so, so I'm ready to exit when prudent).

 I’m also long a few stocks that I consider rule breakers or that have good moats. The fear of missing out can be irrational as the market hits newer highs and the reality of life is not much better.  If you consider, however, that we are just now coming up to this year highs, it still mean we are well below the October levels in most areas. If the market is a leading indicator, out one or two quarters, then there could be merit to a slight rise. 

 Regardless, MR MARKET, is not, and does not have to be rational.  I red thumbed auto dealers, retail, and a variety of negative book value companies in my CAP’s profile and Mr. Market has prevailed. Rather than watch the trends of the index’s, I’m now watching the trends of individual stocks and sectors.

 If MR MARKET doesn’t care about fundamentals, he still helps to set the trend and resistance levels. Whether they are where I think they should be or not, they are MR MARKET’s reality and MR MARKET is driven by fear. 

 You can't win if you don't play. You can't lose if you don't play.  There is merit to both sides of the trade.  I believe you can win if you play carefully and that winning, and sometimes losing, is more "fun" than not playing at all.

But then again some of us are just warped.

Best to all, Understand your fear and control it.


3 Comments – Post Your Own

#1) On May 06, 2009 at 7:32 PM, soycapital (< 20) wrote:

Good post! 

I'd say that currently the market is rising because of a powerful combo of two of your above listed "fears".

Once you succumb to the fear of loss by selling and are looking at red down 40-50% then as you watch the market rise day after day fear #2 kicks in namely the fear of missing out! This, take my word for it is a pretty powerful combo. My two cents.

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#2) On May 06, 2009 at 9:50 PM, nuf2bdangrus (< 20) wrote:

The rally ends when bears throw in the towel and cover.

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#3) On May 07, 2009 at 1:50 PM, mindmuse (30.42) wrote:

I will tell you that personally my fear of the unknown is currently trumping my fear of missing out. And the unknown is very much when and how (the if I would say now is a known) the government will change the rules. The latter day Bush administration and the early Obama one seem completely cavalier in their willingness to alter the rules of the game, from bailouts to engineered deals to now subordinating senior debt holders in the Chrysler situation. It's not just the perennial tinkering and regulating stuff we've always had, it's pulling out the whole underpinnings of capitalism. Shame too, just at the time in my life I've demonstrated to myself I can excel at the investment game, I have no confidence tomorrow's rules will be similar to today's, so the whole underlying risk premium for playing is much higher. 

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