Rev Sharrk:
Logic and Reason -- Who Needs 'Em?
"The sign of an intelligent people is their ability to control emotions by the application of reason."
-- Marya Mannes
If we use the logic in the statement above there is a good argument for the proposition that the market is not a very intelligent entity. The market has little capacity to control its emotions and that is what makes it so difficult for even the most reasonable and logical individual to accurately predict market direction.
The shorter the time frame you are considering, the more the market is governed by emotional considerations rather than logic and reason.
The best traders stay focused on psychology and emotion in the short term and avoid the great temptation of imposing logic and reason on the market beast. However, in the longer run the market does eventually bow to the power of reason. The problem, as demonostrated by the bubble move of 1999-2000, is that emotions can dominate for a very long time and what seems reasonable can be ignored for many months.
The action yesterday was a particularly good illustration of how the market frustrates "reasonable" investors. On Tuesday it looked like the frantic rally that started in August and picked up speed in November might take a little breather. Some of the highfliers and market leaders pulled back on above-average volume and it looked like we were ready for a little rest. However, the Kmart (KMRT:Nasdaq) and Sears (S:NYSE) merger, along with an upbeat report from Hewlett-Packard (HPQ:NYSE), caused a big opening gap and once again stirred up panic among the underinvested that they were going to miss out.
What is particularly interesting is that many of the folks who came in to Wednesday prepared for at least a minor correction weren't inclined to use reason and logic to comfort themselves as the market took off. They joined the charging herd and added fuel to the fire.
Eventually the frenzy slowed a bit in the afternoon but you can be sure that there are many traders who are looking for another outbreak of bullish exurberance What we need to keep in mind right now is that the driving emotion at the moment has a bullish bias. The nature of the market is that trends driven by emotions do not turn easily.
The great dilemma of this market right now is that so many bulls and bears are anxious for the market to rest that it makes it even harder for that to occur. I mentioned a couple weeks ago I was looking for a strong finish to the year but this move is jeopardizing that to some degree by going too far, too fast. We would definitely be in better shape technically if we pulled back soon. However, as I said above, logic and reason have little place in an emotional market.
The early action is slightly negative following poor guidance from Applied Materials (AMAT:Nasdaq). Overseas markets were mixed to slightly weak. Gold is taking a rest as the dollar is stabilizing a bit. We have weekly unemployment claims, leading indicators and the Philly Fed report due out today.
It is good to be back and I'm anxious to get back in synch with the market. My thanks to Cody once again for an excellent job on very short notice.
Gary B. Smith: