As a trader, I can understand the appeal of a tidy little saying.
-Seeing things too soon is as bad as seeing things too late.
-“A sure thing” is a dangerous thing.
-The foolishness of the many is the opportunity of the few.
-Eternal vigilance is the price of – success.
Those are all tidy little sayings from the book, Speculation as a Fine Art and Thoughts on Life, written by Dickson G. Watts in 1880.
In reality though, I’ve found that sayings sound nice, but have little instructive value in practical terms. Most sayings are mere platitudes. Except for one I used last week in reference to Japan – “escalator up, elevator down.”
I am not sure if we are on the cusp of a correction in the U.S. stock market. Some warning signs have built up, notably in the commodity and currency markets and weakness in macro data, but there are always warnings signs. Do those warning signs lead to sellers overwhelming buyers? So far in 2013, that has yet to happen. But I am confident of one thing – when the selling bout does occur, it will be accompanied by nasty, volatile selling, rather than the grind higher that we have seen. Psychology dictates that rallies are usually orderly, and corrections are for the most part disorderly.
And given how orderly this rally has been, I anticipate a particularly ugly selloff. Here is the chart of the SPX index in 2013:
This rally has been amazing in its consistency, as the SPX has hardly touched the 50 day moving average (pink), much less approached the 100 day (green) or 200 day (black) ma’s. It’s practically the perfect picture of an escalator chugging higher.
One look at Japan’s move last week can fill in how the elevator back down can look, however.
I am bent more bearish than bullish here, but I could be wrong. I offer my thoughts, though, not as a prediction, but as a guide, so that when the panicky correction finally arrives, you won’t be the one selling at the bottom out of fear.