Thursday, August 16, 2007

How Now Brown Cow?

Here is a fantastic posting from Dr. Brett.

  • Suppose you're contemplating a sailing trip. The weather forecast suggests only 10% chance of a thunderstorm, so you decide to set sail.

    As you get out onto the ocean, you notice a few raindrops. Then you notice the sky darkening. The air pressure begins to fall rapidly.

    What do you do: continue your voyage or pull into port?

    When traders examine the historical record for what markets have done under particular conditions, they come up with their own weather forecasts for the market. When conditions have been bullish, the forecasts after market declines are apt to be bullish.

    But suppose you begin to venture into the market and notice fewer stocks making new highs. Then you observe more selling pressure than buying with respect to the NYSE TICK. You see the advance-decline line making new lows. You see continued signs of risk aversion among institutional traders.

    What do you do: continue buying the market or pull back?

Click here for the rest of the article:

And over at FSO, market commentator asks if Reality Setting In?