Friday, August 5, 2011


Here is the media reaction to the latest 12% drop in stocks which I think culminated in high volume, panic selling yesterday.

My favorite image is right above this post and appeared on page one of today's Chicago Tribune business section. In big, black, block letters, the Tribune's business editor leaves no doubt about what he or she thinks you should do!

Above that are images of today's front pages of the Tribune and of the New York Times. The stock market is in the headlines, spread across the front page, in both papers. The emotional content of the headlines is subdued relative to those we saw in 2008-09 but I wouldn't expect to find hysteria in the headlines in a bull market.

The top chart is a daily bar chart of the cash S&P 500 going back to the start of 2010. The most significant thing about this chart is that the 200 day moving average is still rising. Unless and until it drops 2% or more the bull market is entitled to the benefit of the doubt. In a bull market a drop below the moving average is a buying opportunity. Compare this one with the one we saw in 2010 (green dash ovals).

I think this is a buying opportunity for the contrarian investor. The aggressive contrarian strategy I described in my book already has an above average commitment to stocks so no action is called for.

I think that this selling squall will soon pass and that the S&P will resume its bull market advance to new highs above the May top at 1370.


  1. You forget that earlier FED was pumping money in the system, which is no longer the case.
    Just because we want to be contrarian, does not mean we have to stand in front of a coming train.

  2. Carl - monster bounce to 1300+ then drop to 1100 (or a little under). IMHO, we have had the fast decline that is the first step of this mini bear. The next step will be a fast retrace, which will be followed by more protracted decline. All this should be done by end September. You could even call this a correction within the major bull market trend.

  3. Where is the negative sentiment? look at this
    I think you are grossly underestimating this dip. I am sure the newspapers read the same in Jan 2008.

  4. According to my platform tools, the SPX corrected 13.9% and the ES 13.7% from the 7-22 high. What caused you to you revise your target down from 1400 to 1370?

  5. That's the one thing I don't buy about using headlines as contrarian indicators. It's gotten to the point where EVERY 10% correction will be met with end of the world headlines. Eventually one of those 10% corrections will lead to a bear market. So in essence a contrarian trader is just buying the dip in a bull market and the strategy will work until it doesn't. You don't need negative headlines to buy the dip. Much better indicators are actual sentiment indicators, not a random sampling of mainstream press articles which are by design supposed to be extreme.

  6. well you said the Debt debate was much ado about nothing... the market has fallen 12% since it started. As it turns out the selling this week was known to some insiders as we saw a US debt downgrade today. US senators and Congressman are not prohibited from insider trading and they had this news.

    The debt debate in fact, caused this downgrade. My guess is the impending downgrade caused the bulk of the selling this week -- especially after Tues. I would like to think the selling of the last couple weeks will be proven wrong. But I sure would have liked to have the inside track on the S&P Debt decision days earlier as many in the Gov't did.

    Not so sure it the Debt Debate has ended up being nothing after all.