Sharp Market Gyrations Could Imply an Inflection Point

The path to a robust political economy must begin with treating political decision making (and the incentives and information embedded in that process) in the realm of policy making not as a footnote caution, but at the very beginning of the analysis.-Professor Peter Boettke

Violent gyrations in the equity markets usually occur during inflection or reversal periods of major trends.

While the current upside swing could reflect a bottoming phase, on the other hand, it could also reflect a transition towards a downside bias—a bear market.

For example, in 2007, after the first jolt from the market peak in July, both the major bellwethers of the US and the Philippines, the S&P 500 (blue-bar) and the Phisix (black candle), dramatically recoiled to the upside (red rectangles).

The initial rally saw both indices BROKE out of the resistance levels (green vertical lines) but eventually faltered. The second downswing had almost been a miniature replica of the first violent reversal.

Seen in the lens of a chart technician or chartist, such dynamic represents a chart pattern failure, where whipsaw motions can be identified as ‘bull traps’—or as investopedia defines[1],

A false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline

Consequently, following the two failed patterns which diminished the vim of the bulls, the bears assumed dominance.

Don’t Get Married to an Investing theme

I am NOT suggesting that today would be a repeat of 2007-2008.

I keep pounding on the fact that patterns only capture parts of the reality, where the motion of time will always be distinctive with reference to the changes brought about by people’s actions, as well as, the changes in the environment.

It would signify a monumental folly to bet the farm based on the expectation of pattern repetition alone.

And one of the major difference between today and 2007-2008 as I wrote last September[2]

Central bank activism essentially differentiates today’s environment from that of 2008.

As I explained before[3], my bias outcome is for a non-recession bear market.

I think current US markets will likely exhibit symptoms of the non recession bear markets of the 1962 (Kennedy Slide) and 1987 (Black Monday).

Charts from Economagic

And this should be reflected on global markets too

But exposing risk money based on personal biases can be very costly.

Individual expectation of the marketplace and reality usually depart. We DO NOT and CANNOT know everything, and should humbly accept such truism. The desire to see certain outcomes, when facts present themselves to the contrary, will inflict not only monetary losses, but most importantly, mental or psychic anguish from stubborn DENIAL.

This explains the popular trading maxim “Don’t get married to a stock.” Rephrasing this, we should NOT get married to an investment theme.

Prudent investing suggest that we should be taking action based on theory and backed by evidences which either confirms or falsifies it. Confirmation means that we can position to gain profits while a non-confirmation should impel us to consider exiting positions regardless of the profit or loss standings. Learning to manage the state of our emotions reflects on our degree of self-discipline.

And since our understanding of the marketplace shapes our expectations and our attendant actions, we need to seek constant improvement. Expanding our horizons should improve the batting average of our profitability or returns.

Going back to the financial markets, it has been my understanding that the principal drivers of the global financial markets has been the actions of political authorities. Their actions do NOT merely influence the markets, current policymaking via accelerating dosages of inflationism, myriad forms of trading controls and the imposition of byzantine financial and bank regulations represent as direct acts of market manipulation.

Political insider trading not only distorts price signals but importantly politicizes the distribution of gains towards the political class and their benefactors.

In short, in the understanding of the above we just should follow the money.

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[1] Investopedia.com Bull Market Trap

[2] See Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation, September 18, 2011

[3] See Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles October 2, 2011