Tuesday, April 7, 2009

Butterfly Flapping

Here is an excerpt from Tuesday's Quick Takes Pro. Yes, I lapse into pop culture - a lot. But the relevance to the market is real.

What is going to happen when – or we’ll concede to if – the market starts to fall on earnings? Mood will sour quickly in our view and once again we’ll hear the doomsday analysts back on the air looking for Dow 3500.

Bring it on. The more people that get scared the better the chance that we are indeed carving out a bottom. We think the next leg down within the giant trading range that began a few months ago will deflate investor psyches worse than before even though we do not see a lower low in our future.

Here is an obscure movie reference that drives home this point. Sorry, youngsters, you will have to be a real student of Hollywood to know this one. If you are not a pop culture fan, feel free to stop reading the chatter section right here and move on to the charts.

In the 1973 movie Papillion, starring Steve McQueen and Dustin Hoffman, the main character was in a nasty prison and the powers that be wanted to break his spirit. After years of confinement, they told him he finally had a visitor, likely someone important to him. He washed, shaved and dressed in nicer prison garb after anticipating the visit for days. When he got to the meeting room they told him there never was any visitor coming – ever.

Imagine his mental state deflating like the Hindenburg. To us, this is what is going to happen during the next leg down in the market, as the economic recovery everyone thought was at hand is not to be. But like the prisoner, the market will physically be no worse than it was last month. Only its psychology will be smashed.

End of excerpt. And why the title for this blog post? Papillon is butterfly in French.


Blog do Claudio Digital said...

Very nice analogy...

Amalan said...

didn't see the movie, but read the book; recall it as quite thrilling, but have forgotten the details - has been so long.

Regarding your cyclicals vs. consumer indices and such.. do you subscribe to the cyclical bull vs. secular bull classification? It appears now that the rising trend from 2003 - 2007 was merely a cyclical bull, brought about by merely the regular business cycle, as opposed to the 80's and 90's bull that seemed to defy business cycles. Business cycles are expected to last 4-5 years.

The next secular bull will probably not start for another 5 years...it's a traders' market for the foreseeable future.

Michael Kahn said...

Yes, I do see 03-07 as a cyclical bull. Go back to a post here where I put up a chart I drew in 2002 (I think). I called for huge up and down swings in a decade that would go nowhere. That is what I say now and I think what you just said, too.