Saturday, November 29, 2008

Unsustainable fear dissipating

Santa Claus rally dead ahead. The fall panic is over and a tradable rally into the spring has begun. Yes, it will be choppy, but the trend is your friend and for stocks and commodities, the trend is up. If you hold a bunch of stocks in your 401k/403b/IRA, you should stay put and you'll get some of your money back. Remember, though, that come March or so, it will be time to sell ALL OF YOUR GENERAL STOCKS! No excuses.

Also remember that by March or so, everyone will be saying that things are going to be OK, our government is so smart, Obama and Bernanke have fixed everything, blah, blah, blah. It will all be bullshit and completely incorrect. This is an expected technical bear market rally, nothing else.

Panic is a quantifiable item in general equities thanks to the $VIX or volatility index. High volatility = high fear = markets going down and/or uncertainity is in the air. Looking at an 18 year chart of the volatility index, it is clear to see that this fall's panic was one for the history books and that the fear won't last:

Now, the shorter term picture for the $VIX:

Everyone panics, the world is coming to an end, everyone sells, and then the funniest thing happens: the markets stop going down and actually go up. Nothing has changed, our economy is still heading for its worst recession in 50-80 years, yet we're going to go higher into the spring. As the fundamentals get worse, stocks will temporarily go up. Why is this? Sentiment or feelings/attitudes/emotions. Forget the rational market hypothesis crap. What a joke! The S&P was worth 1500 one year ago and last week it was only worth 750 based on rational investor analysis? I call bullshit when I see it and that's complete bullshit.

Though longer term the market is fairly rational, short term it absolutely is not. We just had a classic fall "panic," which means, ummmmmmmm, people panic! One of the worst legs of this bear market is over. I'm not sure if it will be the worst leg down, but it wouldn't surprise me. The long term trend is down. However, because markets are not rational short term, good money can be made by going long here despite knowing that general stocks are in a nasty bear market.

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