Friday, April 9, 2010

REGRESSION TO THE MEAN

The market is heading into dangerous waters. Sentiment has become skewed wildly bullish and historically the market hasn't performed well during earnings season when entering at new 52 week highs.

One of the few principles that never fails is that all market eventually regress to the mean. That one you can take to the bank. Usually the further anything stretches the harder it snaps back.

It looks like the market desperately wants to reach the 1200 level but in doing so it will have stretched further above the 200 day moving average than at any point during the middle and final leg of the prior bull market.


The market is now dangerously stretched and due for some kind of correction to reset sentiment. My guess is that sometime during earnings season we are going to see a violent correction similar to what happened in February 07. That should reset sentiment and set the stage for possibly a final parabolic move higher that will likely cap this cyclical bull.

The catalyst will be the same one that crushed us in 08, spiking energy costs. $100+ oil in a very high unemployment environment is going to be an economy crusher...again!

4 comments:

  1. what dates are you using to define "earnings period"?

    ReplyDelete
  2. BTW, if the correction is similar to Feb., then wouldn't that make the next leg up the fourth leg (rather than the third)?

    ReplyDelete
  3. I'm expecting something around 4-6% but sharp like Feb. 07. Then a final parabolic move intot he summer.

    Earnings season starts Monday and runes genrally till the first week of May.

    ReplyDelete
  4. Toby, when you mention almost any asset classes will explode, what do you think will happen with other energy sources like Natural Gas?
    Just curious, as it really is an energy source that is languishing at terrible lows, and the massive supply and storage amounts makes you wonder if it will respond.
    I still think we need to see the USD roll over and head down to give momentum to your theory. What do you think?

    ReplyDelete