July 09 Murphey's Law

Early July 2009- Murphy’s Law Applied

“If something CAN go wrong, it WILL go wrong.”

My unofficial mentor in technical analysis was Bob Farrell, former chief market strategist for Merrill Lynch. He was a master of Murphy’s Law. Bob [now retired] tried to assess current market opinion: when he found a significant consensus, he wondered what could go wrong. What would cause grief to the maximum number of participants in the stock market? Let’s try his technique.

Right now I notice that the consensus opinion about the US stock market is this:
1. The market bottomed in early March 2009.
2. There was one great three-month rally which peaked in early June.
3. Now there will be a reasonable correction, which may test or confirm the March lows.
4. Once that is over, the market will continue up in a multi year cyclical bull market.
5. The best strategy is to wait for the correction and then buy into this market.

What could go wrong? What events would frustrate the most investors? What would Murphy have to do to catch us all off guard?

Bullish Scenario: the market correction is very shallow and the upsurge starts sooner rather than later.

Bearish Scenario: the market correction is not just a normal correction – the dam lets go and the market has another big decline like it did last year.

Self-psycho Test: Does either of these two possibilities make you nervous? Do you feel a tiny twiggle of unrest in your stomach when you realistically assess these two reasonable scenarios? If so, you have bought into the consensus and you are in danger.

Let’s review the bullish scenario: the market corrects only slightly, and then launches into a multi-year cyclical bull market. The stock market is a lead economic indicator, often bottoming about 6 months before the economy. Six months after March is September. If our bullish scenario unfolds, we should see some signs of economic recovery this fall. Before that, we should see the market go higher than the June highs. This scenario doesn’t really rock your stomach with worry, does it? Logically, if our bullish scenario unfolds, we would add to our stock portfolios if the market exceeds the June highs; and add still more if those earnings reports and unemployment figures start to stabilize.

Let’s face it: it’s the bearish scenario that rocks your boat! Last summer the market eased downward in July and August. Then the wheels fell off! Mutual funds and pension plans recorded serious losses: it will be years before they can break even. This is the scenario we all dread. Logically, if our bearish scenario unfolds, we should sell our stocks now. Sorry, I did not emphasize that enough. “WE SHOULD SELL OUR STOCKS NOW.” [Just like last year at this time.]

Self-psycho Test #2: Does the notion of selling out of the stock market now make you nervous? Do you feel a tiny twiggle of unrest in your stomach at the thought of not owning stocks at all? If so, you are way too bullish AND you didn’t learn from 2008. Murphy’s Law will get you.

In my book, Beyond the Bull, I discuss the emotional aspect of the stock market. How you feel is important. Uncomfortable feelings come from false beliefs and false logic. When you feel serious negative emotions about the markets, pay attention to them.
Canada:
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
USA
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

Ken Norquay, CMT
July 7, 2009