Monday, November 30, 2009

Stock market farming

Big news: It didn’t snow

Never in recorded history: that’s the last time the City of Toronto had a November without a trace of snow. 2009 will be the first snow-less November ever.

Whenever we talk about the weather, we habitually refer to weather’s history: “We haven’t had a storm like this since 1967…” We human beings live with weather day to day and we seldom have unique weather experiences. This November was unique.

In a way, the human experience with weather is a bit like our experience with the stock market. Each day is seldom interesting on its own; not really. Most days are more or less like many other stock market days – up a little, down a little. But let’s face it; these are non-events - like day to day changes in the weather. And now we have a November record of something that didn’t happen: it didn’t snow.

Day to day weather is like day to day stock market activity: boring.

But, when we string together enough non-event weather days, we notice something very interesting: the change of the seasons. Each day may be insignificant; but when we string 90 days together, real change happens. The same is true for the stock market. If we string together enough of the stock market’s non-event days, we can see the up trends and the down trends. And we can see the transitions between them. Now it’s getting interesting. Now investors can act like farmers. Farmers plant their crops when the weather turns from cold to hot. And they harvest when the weather turns from hot to cold.

Does the stock market have seasons? Are bull markets and bear markets like summer and winter seasons? Is there a time to plant and a time to harvest? You bet there is! Remember May and June 2008? That was stock market autumn: time to pull in the harvest. Remember late 2002 to early 2003? That was stock market spring: time to plant. Unfortunately for investors, the financial seasons are not mechanical and predictable like the agricultural seasons. We are forced to act like squirrels who can’t read the calendar: we have to watch for the signs to determine when we should gather our nuts.

What are the signs of financial autumn? Can history teach us anything about those times when the up trends turn down, when the bull markets give way and the bear markets emerge? In my book, Beyond the Bull, I review stock market cycles. It seems the secret lies in the attitude of investors. At long term stock market tops, investors are very optimistic. At bottoms, investors are overly pessimistic. It’s all about investor attitude.

As always in the stock market, the question is: what season are we in now? Should I be buying or selling? The answer? Look around. Are investors too optimistic or are they too pessimistic?

The statisticians who measure investor attitude report that investors are quite optimistic; and less pessimistic than they have been since 2007. This statistic is telling us to start up the combine and start bringing in the crops. It’s time to do what we wish we had done in May and June of 2008. Sell some stocks.

Ken Norquay, CMT
Financial Philosopher

Links to Beyond the Bull:
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

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

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