This was a tough week for the markets. Strangely, it might soon prove to have been a good week for the markets as well.
So what is it going to take for the markets to finally bounce? History shows that most intermediate or long-term bottoms are characterized by panic selling, hopelessness, and people simply giving-up. If that is the standard, then we may be close.
Here is some of the evidence of the fear, uncertainty, doubt that often accompanies bottoms:
- This week reversed most gains from the prior week's rally and short-squeeze.
- The markets continue to flirt with lows for the year.
- Because of the volatility and gaps, trading simply hasn't been normal recently.
- The economy and the markets dominate news and popular culture.
- This week, the President of the United States basically said that if a radical bail-out wasn't done, right now, it would damage our economy - and many others across the globe.
However, as bad as the markets did last week, they held up reasonably well considering how much bad news there has been and how close to the edge things really were (or are). Also, while markets went down, it was on lower volume than last week, and we didn't break last week's low.
The Calm After the Storm. It's
also probably worth noting that, historically, periods of great
volatility are often followed by periods of much less volatility.
With that in mind, I do believe that the government will reach a reasonable compromise to end the "Deal - or No Deal" situation very quickly. It's also likely that this agreement and the liquidity that it brings will give the markets some room to breathe and some fuel for a meaningful rally.
On the other hand, there is a long way to go from here to recovery. Some people see this as the end of the crisis. At best, I see this as the end of the first step on the road to recovery.
You Can't Bounce Until you Hit Bottom. There are many corollaries in nature. This troubling time created a clearing. Much of the fear, uncertainty, doubt, and baggage from past mistakes are being wiped away. Firms are closing, the landscape is changing, Wall Street and our economy will literally never be the same again. And, yet, this kind of clearing is often the catalyst to new beginnings and fast growth.
Noise Reduction. When creating automated trading systems, one of the things that becomes increasingly important is to recognize the difference between signal and noise. Right now, there's a lot of noise. The markets, market players, and even governments are spooked. Under those circumstances, it doesn't take much to stir things up.
The bailout and worldwide cooperation can be looked at as noise reduction. Temporarily, there will be a forced and tenuous peace. The hope is that as things calm down, people will make decisions from a stronger position (or at least from a position that's less fearful than where they are now).
Remember, a journey of a thousand miles begins with one step. Here's to progress.