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Friday, October 24, 2008

The Markets and Rick's Cafe

In the famous movie Casablanca there is this equally famous line.


I am shocked, shocked to find that gambling is going on in here (Rick's Cafe)

It appears the markets worldwide these days are also shocked by equally "shocking" revelations. In the last couple of weeks, the markets have taken a dive because of "fears of a recession" and in the last couple of days it has tanked due to "poor earnings".

It appears the market is just now discovering that the economy worldwide is bad. As a result, we are seeing signficant volatility, and mostly market negativity, due to things that one would think would already be embedded in the price of the market. One normally shouldn't expect the market to drop due to "recession fears" a week after the U.S. Congress bailed out banks in order to avoid a protracted RECESSION.

So, what does all of this mean. To me, when the market responds to "news" that isn't actually NEW. That tells me the market is in a protracted state of whatever the "news" is. In other words, we are now in the middle of a protracted bear market. If the market is going to drop everytime something negative is going shock the market as though it was unexpected, then the market has plenty of shocks left. If the market is going to treat "fears of recession" and bad earnings as something new and unexpected, then there is still plenty of negative "news" for the market to respond to. As such, I am making a bold prediction, Dow 5000.

While I am bearish on the market, I continue to only recommend a volatility play.

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