We Almost Always Think The Worst

Stock markets are up over 50% since the beginning of March. In May alone investors have plowed 4 billion into emerging market investment funds, and the U.S. stock market now doesn't look like a a bargain anymore.

Couple this with stupidity, as an example:

Hybrid vehicle sales have fallen as much as 50% from 1/1 to 4/30, as gas prices fell. Hybrid cars represent only 2% of the entire consumer vehicle market.

Both of these above statements should shock you:

1. 50% increases in 60 days? Are things better?

2. Hybrid sales down while GM plans its first 44k Hybrid, due out in 2010?

Perhaps we need to have a "stupid tax".....for all those that really act stupid (vote for Bush twice, buy Hummers, drink plastic bottled water, support Rush Limbaugh) they would have to pay twice the taxes? Perhaps we'd shut them up a bit?

An interesting perspective on our own human fragility, and how emotions enter a trade is key here:

1. We almost always think the worst.

Ex: My dog, Lacey, who I love more than my wife, has a "large lump" that is in biosopy, and may be "of real concern," said the vet Friday.

Lacey is a 9 year old Labrador, and my first thoughts are: "cancer, death, pain, fear, anger"

2. When things are right, we never think of the worst.

Ex: The stock market rises over 26% in a 28 day period.

We think: "The worst is over. Everything will be okay again"

We may have FEAR, that it will fall again (lose our profits) or GREED (we should have bought more when the market was at 6400 not so long ago), and we may "talk" with others but in our hearts "the best is yet to come."

These are examples of our human and emotional perspective on what is. The only facts we have in either of the above situations is what we know so far. We do not know what we don't know (This is the most important statement we can make to ourselves).

Use these examples (from "My Dog is horribly sick" to "the bank stress test showed enough strength") all with that knowledge. You know only what you know, not what you do not know.

What is key here, and the lesson we must learn as traders is:

-We never appreciate how good it is when it is good. NEVER!

-When there is bad, or our perception of what is bad, we have a human need to create drama, which worsens with our emotions and creates negative attractions, making our behaviors and reactions work wrong.

New Ager's talk of the "law of attraction," a key and true element of focused thinking, but the reverse (the creation of drama, or the lack of "fear") is what we must watch as traders.


____________

We now know that the big bank consortium met with Geitner and softened the stress tests. We remain bearish only because we do not think the enormity of what we will have to spend is even understood by the American people. Trillions more will be budgeted and spent, and sadly, we think it has to happen.

A thought on how the cycle will move: A young person graduating from college or with an MBA is virtually assured of low wages, based on the what the market has "shifted to" (and industries have taken advantage of) in lowering of wages. The new "spender," who fuels our consumer price index, will have far less to "spend" than the last two generations, and the now bankrupt Baby Boomers may be the "servants" to the lower wage earners, and their own children. (A note from the webmaster... "But the children, most often, will be living in the house of their parents because they will not be able to afford their own ; ))

Yesterday we saw, before 3 p.m., a market drop to 8383, a classic support and resistance area now, and following that a market that simply hovered at 8450, the top resistance line, for several hours, up until the 3 p.m. hour. And by 4 p.m. the market had moved to 8370, which we've hit time and time again, and is our Dow projection line.

And, we made money. Watching futures no trader would have entered on the call, with futures over 90 points down near opening, and fluctuating valiantly to show negative bias. The May 430P, however, during whipsaw was available only slightly above prior day close, with buys as low as 8.00, and sells from 9.30 to 11.00, again all by 3 p.m., for a nicely profitable day trade. Puts were also available for tight day trades in the final hour.

Note: It is highly possible the market has short term bottomed. If this is true we could see a run up to our Dow projected TOPS and another downturn to the 8250 area.