Monday, September 24, 2007

Hope and Fear

I see quite a few comments on the blogs that the markets are overbought and that's the reason that a correction is imminent. I've got news for you hope and fear operate differently. Which is to say that markets don't go up the same way they go down. Pretty much any breakout is going to be overbought. Just look at the two charts. The S&P was already overbought by the middle of Aug. in 06 but that didn't stop it from going up another 6 1/2 months. Same for gold only it was even more extreme. As markets continue to rise hope gradually brings more and more investors in as an increasing amount of people become confident in the move. Sometimes this becomes really heated and you get a parabolic rise. Fear is a different animal altogether. It doesn't take too much pain before everyone gives up all at the same time. When that happens there are no sellers left to sell and the market has no where to go but up. That's why the VTO and Bollinger band crash trades work during declines. If you tried to reverse the rules and apply them to tops they will fail miserably.