This ain't normal

Posted by downtowntrader | 5/06/2010 11:03:00 PM View Comments

I was having a conversation recently with a friend about how the markets were normalizing after two years of abnormal price movement. If you really think back, the past two years have seen a stock market decline of historic proportions, and a relentless, although quite measured rally back to correct a portion of the decline. Some indicators like t2108 (stocks trading above their 40-day moving average) became less effective as they were pegged to oversold or overbought readings for months at a time. Even more impacted than price movement is the psyche of traders who were involved with the markets during this time. I know people who still refuse to put money back into the markets after being burned in 2008. Others remain steadfast in their belief that the markets will eventually collapse even worse then they did in 2008. While I will readily admit that I can't see into the future, I have been open to the idea that the worst is behind us. One thought I have pondered is whether the markets had over priced a complete failure in the system and that despite the multiple problems in the economy, they aren't worse than what the markets feared in 2008.

Recently, I was starting to think that the markets were slowly getting back to normal and that while the market certainly needed a healthy correction, the market remained relatively healthy. While there are still plenty of problems with the world's economy, the stock market was shaking off the bad news. However, today proved that things are not healthy. Normal markets don't act like this. While there have been plenty of warnings recently that the markets would correct as stocks like Green Mountain Coffee Roasters Inc.(Public, NASDAQ:GMCR),Cree, Inc. (Public, NASDAQ:CREE), NetLogic Microsystems, Inc. (Public, NASDAQ:NETL), and Buffalo Wild Wings (Public, NASDAQ:BWLD) have been hammered, I don't think anyone expected 1000 point drop in the Dow with no breaking news. While we may never know whether this was trading algorithms gone bad, a fund blowing up, or a fat finger fiasco, the bottom line is that the markets did drop sharply, and traders will be on edge for the foreseeable future. One has to wonder how many regular Joe's will decide to go to cash in their 401K in fear of a repeat drop. While I was lucky that today did not impact me at all, I have to think many traders got whipsawed and lost some emotional capital today in addition to real money.
I have to admit it was tempting to buying into the close today, and I did in fact open a couple of trades, but the best course of action is probably to stay on the sidelines with any cash right now. Everything depends on your trading style, but for my time frame it makes the most sense to wait until the markets stabilize a bit. I remain open to all scenarios and can see multiple scenarios ranging from a capitulation low being formed today to the beginning of even more selling in the near future. Because things could really go either way here, I will remain mostly on the sidelines or hedged with options on the few plays I do take. Again, your trading style will dictate when it's a healthy environment for you, but for me, it will take some time for the markets to stabilize and provide a lower risk opportunity.

Good Trading,


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