chk999 (99.98)

Market Mode Switches

March 31, 2009 – Comments (2)

They say that "nobody rings a bell" at market top or market bottom. And this seems to be true, if anything, market tops and bottoms are marked by articles about how it will continue to get more like this forever. Thus I am greatly cheered to hear that George Soros thinks the recession will go on forever.

Right now I am pondering market modes more than market tops and bottoms. It seems that the stock market has two general modes. One we usually refer to as a bull market. In it prices generally advance, although action in any day can do anything and there may be some pretty large corrections. The other is usually referred to as a bear market. I think this is a bit of misnomer as the market is more likely to thrash about wildly without actually making a lot of progress in any direction.

Now, tied in with market mode is investing style. In a bull market buy and hold works just fine. Also being fully invested works just fine as cash just drags down the returns on a portfolio. In a thrashing market carrying cash has some great advantages as you can snap up some bargains. And just buying and  holding may not work as well, especially if the stock does not pay a dividend.

Market modes seem to last long enough that they hit a blindspot in human cognition. We tend to extrapolate recent results into the future forever. So near the end of a bull market the percieved wisdom is that buy and hold is the ultimate strategy. And then after a while in a thrashing market buy and hold is considered to be dead forever. I now keep reading postings about how buy and hold is dead, so we are into that part of the process.

When will the next mode flip happen? Beats the heck out of me. I would not be surprised if it took several more years to work the credit crisis all the way through the system and lay the foundation for the next big run up.

There's something I've felt about the '02/03 turn down, which is it felt like it never quite finished. I base this feeling mostly on office space occupancy in my local area. A lot of office space went empty during it that never refilled during the '04/07 upturn. So in some ways this downturn feels like the washout that should have happened back then and didn't due to meddling by the fed. Watching what the fed and friends are doing now does not give me a warm feeling. But that's a topic for a different essay.