I thought I might take a bit of a longer look at the events of last week and see what they might mean; if anything. One of the interesting things about markets is the presence of perma- bears – that is traders/pundits/general idiots who no matter what the market condition are constantly calling for the market to crash. Every year they call for the market to fall between 25% and 40%. Interestingly, it very rarely does and since the GFC the US market has headed towards the moon and this in part fuels the petulance of the bears for most of them have completely missed the run. Last week would have seen the bears with a permanent case of trader wood as they prayed that their long promised crash would appear. Unfortunately for them, it so far has failed to materialise.
When looking at markets it is necessary to take a step back and look at the big picture and try and avoid the noise. Whilst at the AIA Conference last week I sat in on my mate David Chia’s presentation and he made the interesting point of how does knowing the Dow had fallen a few hundred points alter either your investment decisions or the philosophy of your investing. The point he was making is that for the majority of people this is just noise and it has no bearing upon the decisions they make. If your basic philosophy was to be long the US then to my way of thinking this is still a valid point of view. Consider the chart below which is a weekly chart of the Dow.
To my way of thinking the long term trend of the Dow is still intact – the trajectory of price is not linear, prices dont start bottom left and finish top right in a straight line. Price is a dirty marker of sentiment, it has to be since people are irrational and indecisive. So long as price continues in that broad up sweep i would consider the Dow to be just pulling back. The same can be said for the daily chart, from which you get a sense of how noisy charts can be which is why I favour looking at weekly charts.
The other tool that fascinates me is the VIX which is still refusing to become too flustered. The current reading is a fraction of what it has been during other market shocks. The issue to watch for as i have stated before is that markets can talk themselves into pullbacks and when they do pullback everyone goes i told you so and we move on again.
Eventually all market runs end and they always end with a bang – that is simply the nature of people. When it will end I have no idea – I have trouble working out what is going to happen tomorrow in my own life so knowing what is going to happen in the market is whatever time frame you care to nae is beyond me. All I know is that markets go up and markets go down.