The markets stopped their seemingly weeks long freefall last Friday, May 13th, with green numbers across the board. Not all stocks went up. I can’t actually recall a day when every stock did go up, but certainly Friday was a welcome sea of green in an otherwise month or three of mostly red.
Although no one can forecast market direction at any time with certainty, Mr. Market does speak to those analysts that are listening and know its language.
It’s a difficult thing to interpret, Mr. Markets language, but serious students of the equity marketplace and those having the experience to have lived through many a correction and rally can at least get a grip on the mood of Wall Street if they take the time to listen.
When markets start to fall, certain things can occur that, when watched, lead the analyst to draw at least a few conclusions. When Wall Street’s mood turns negative and stocks pull back, it is common to see certain sectors rise in a contrarian move to those stocks that are falling. Consumer staples (things like soap and things that people have to buy) can rise. Food stocks can also move opposite to a falling market. So can bonds and utility stocks.
If a sell off continues, the contagious mood of stock selling can begin to lead these same stocks to flatten out and then fall in concert. Basically, even though an initial selloff can move some stocks up at first, the longer the selloff, the more things tend to get sucked down the same black hole of a falling market.
Think of it like a series of lights that is often seen at automobile drag races. The “Christmas tree”, as it is called, is two rows of colored light mounted vertically, that illuminate in series, going from red to green, where green means both dragsters floor it.
In stocks, invert the colors, and you have a warning system that goes from green to red. Green means all is well, then as a crash progresses, more and more orange lights illuminate until the red ones finally do.
Green means go and stocks are rising, then the first orange light gets lit, meaning markets are pulling back. Imagine another orange light illuminating that may mean more money is moving to bonds, utilities and staples. A continuing crash illuminates another orange light, gold might start to rise while utilities, staples and other contrarian stocks many stop their ascent. Another orange light and these stock now start to pull back as well, following the general market down. Moving further along the warning lights, market leaders (like an Apple or Microsoft), which may have held up relatively well (being favorites of many an investor) finally break down as well. The final orange lights might light up when markets further accelerate downward with seemingly little support. The final red light on our financial Christmas tree of warning lights might occur when all out panic selling obliterates every stock in its path. Also known as a “Capitulation” event, the market is now yelling loud and clear “We are in a full fledge crash people!”
As if anyone wouldn’t know it by then right?
Although there is no financial Christmas tree in real life, I do picture this tool when I review markets both on a daily, weekly and monthly basis.
I ask myself, how many lights are lit? How many signs are flashing? Is it getting worse or better? What stocks are moving up during the crash, and what sectors are they in? How fast are they moving and is it accelerating?
Barring an unexpected and out of the blue event known as a “Black Swan” like 9/11, tsunami or major political event, the markets lingo may indeed be very difficult to understand.
But considering education is the cornerstone of progress, the more you know about the markets, the better listener you will be, and hopefully a bit more tuned in to what the market it is trying to tell you.
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. (530) 559-1214