Sunday, October 4, 2009

Crowd Behavior

 Interesting article in latest New Yorker about the financial crisis.  It discussed how the 'insanity' of the bubble in housing prices was rational because of the short term rewards given to CEO / Mortgage Banks.

Not participating in the bubble, and having a bad quarter, would cost CEOs their job.  Portfolio Managers had no choice but to buy into rallies or fall behind.  They can't act "rationally" if it means showing no gains while those participating in the bubble pull ahead.  Besides, they get paid each year.  When the bubble collapsed, no hedge fund manager had to give back his 2/20 profit share from the year before.

So the Fed's actions this year / approved by Obama (who doesn't know any better) have essentially made "too big to fail" reality and hence, the suprising rally.  But I suppose there's nothing suprising.  The first part of the rally was probably genuine  (into perhaps July).  But somehow, enough extra tricks (cash for clunkers, new home buyer incentives) created a tipping point, a which point, once again, even portfolio managers who don't believe in the stocks they're buying, are buying them anyway simply because they can't not buy them.

So in effect, we should expect bubbles to occur, and occur regularly.  I'm amazed how long they can run, although I suppose 7 months is not that long really.  It's interesting how this latest pullback has occurred, for the second time, directly after the quarter's end.  Right before Q. end is the time for maximum risk-taking.  

My feeling now is that the markets trend lower until about the first week of December and then miraculously start to rise into the end of the quarter.  Although perhaps reality is finally caught up and the market just crashes.  The problem with bubbles, is that the crowd behavior works in reverse.  If, indeed, a tipping point to the downside forms, now all the portfolio managers will sell, even if they fully believe in the stocks they are selling.  (With force liquidations, many don't have a choice.)  In fact, they will more than likely sell the good stocks with greater liquidity, and keep the 'toxic assets' because they can't be sold anyway.

We can see this on the charts.  In many ways, I worry because I don't really do my own research.  I keep forgetting though, that the charts can provide the answers.  If a stock is cheap, a value name, then it will only be a winning stock when more than just value players buy in.  And if that happens, the charts will always begin to show bullish signals.   I continue to try to combine both elements into my investing with mixed results.

Right now, I will be setting a stop on GIGM.  I'm getting a bad vibe and it seems to me if it starts trading below 4.40, it may stay down for a long time.  I'm better off taking a loss and reinvesting then holding on for a long time and possibly suffering greater losses.  My IRA has lost all its short term gains in the past week.  I can tell the next few weeks will be difficult times.

 This week, I will spend more times studying charts and price action and less on fundamentals.

 After all, it's clear something like AIG or even AONE is overpriced, but it is easy to participate in the names on the upside by following charts and momentum than focusing on what it SHOULD be worth.   Value investing is a lonely/patient game, and I believe firmly at the same time that Price pays.   So I will attempt more short term trading this week, focusing on charts and placing appropriate stops.

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