Monday, November 17, 2008

Where to now?

I'm going to take a guess and say investors at this point don't know where to turn? I suspect blog traffic is high everywhere as shell shocked investors frantically look for the market guru that can tell them what's going to happen and what they should do with their investments.

I'll make a few observations for what it's worth.

First off you might as well quit searching. No one knows what's going to happen tomorrow or the next day. We are already making history on a daily basis. The only other time in history even close to approaching what we are seeing now occurred in the 30's. Even then many of the extremes were far less than today. So expecting someone, anyone to have any realistic insight at this point is probably wishful thinking.

At times like this (granted there hasn't been any "times like this" before) I always try to remember one important fact. A fact that never changes no matter what the fundamental environment or technical basis of the market is. Human nature never changes. We are currently experiencing a level of pessimism never seen before in the last 100 years. If there's one thing I do know about human nature it's that we go to extremes. The other thing I realize is that these extremes can't be maintained for extended periods of time. (Extreme pessimism is harder to maintain than optimism. It's one of the reasons tops usually take longer to form than bottoms.)

Remember back in the summer when it appeared that oil would never stop going higher? The current bleak outlook will eventually burn itself out just like the excessive optimism in the oil market burned out. So unless human nature has changed the current negativity will be followed by extreme optimism.

So what do we do right now you ask? Common sense would suggest that human nature being what it is, extremes should be faded.

At the moment I have no idea if the market will continue lower or not. I do know that I don't want to short this extreme pessimism. It's usually much more profitable to short the other extreme...euphoria. I do think we will get the opportunity to do just that at some point as I think this bear will not be done until at least 2010.

At this point though I'm pretty sure the risk reward is better on the long side. However as I noted in my previous post I don't think we are going to spot the bottom with any of the tried methods. At this point I'm thinking more in terms of time than any technical or oversold levels. I'm pretty sure that if one is patient human nature will run it's course and eventually the tide will turn in the other direction.

I suspect that while we wait for that tide to turn most traders trying to pick the bottom are just going to take many losses and only manage to whittle down their account. At times like this it's probably better to just take your stand and do something else besides watch the market all day. Perhaps now is a better time to think like an investor than a trader.