The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

06 June 2010

A working thesis

The equity market's dynamics are always up to the investor to interpret, but its recent negative dynamics continue. Simply, simplistically, and solely: prices rise on diminishing volume, prices decline on increasing volume. The outcome from this particular dynamic, historically, has not been good or positive. To state it mildly.

So what's the problem...? This dynamic has been in force since the low and reversal of March 2009, it worsened off the low of early-November, and became truly ugly since the low of 5 February 2010... and yet the market shrugs off this dynamic, and proves itself resilient, if not also refuse to reassert its broad and wide decline. Of course, Friday's session, as broadly negative as we have seen of late, caused the market to breach finally ES 1080, which quite possibly changes its dynamics, although not yet its direction (as I stated in an earlier reply). At least, not necessarily and not yet; with its current placement after Friday's daily and weekly close, this next week should prove... fascinating; its arrival laden with ominous signs of imminent doom.

My investment methodology relies heavily on market action for insights as to which opportunities appear best situated at any given moment, so the past few months have proved personally damning. Readers and subscribers have abandoned this site because they seemingly prefer short term reward over the intermediate term's mounting risk. (Certainly it is not because I have been proved wrong!) But to invest now, and for the past several months, is, in essence, to play the momentum game (aka, the greater fool theory) -- and momentum with especially horrible dynamics. The decline that began in April might cause these investors to reassess risk, and should they and remove their buy orders, then flash crashes such as we saw on 6 May might become a recurring experience. To prepare you for this event(uality), I described in a previous post this phenomenon of a vacuum of balancing orders that foster the set of circumstances necessary to avoid these sudden air pockets.

The market's changes of trajectory help cause a shift in perception, of perspective; a new parallax view. So Apple/AAPL's chart action of the past 2 months transmogrifies to top from base, and suddenly you see that Google/GOOG began its decline on 4 January, fully 3 1/2 months prior to the market's peak. The question for many stocks now becomes whether the 200 day sma will stem deeper declines.

I took some heat last week for the chart above (updated through Friday's close) for having misidentified the right shoulder, or the neckline, etc; justifiable criticisms, if possibly incorrect. What the commentors do not know is I (attempt to) identify trends and their changes in anticipation of market action; the neckline I identify is nothing more than a working thesis. Although it also (increasingly) appears to be a correct thesis. Time will tell. But what will time tell us...?

This post continues on InvestmentPoetry. See you there!
-- David M Gordon / The Deipnosophist


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