Professor Elam

Market Psychology

Buy
low sell high sounds simple but who does it?  Lately Warren Buffet had to admit his high priced purchase
of Conoco Phillips last year was not such a good idea.  I guess selling out BRK/A at $150,000
was not either as it was cut in half along with the rest of the market. So, if
this has been difficult for you, at least you are in company with Warren
Buffet.

The
S & P 500 hit a low March 9 at 666. That was the low from the high of about
1500 back in October, 2007. I read several websites from various gurus, no one
suggested going long at that level though several suggested we must be getting
close. The result  was a geyser of
buying at that price. The S & P soared unchecked to about 820 in short
order. How did that happen so quickly after so much selling the last few
months? The averages have been down 13 of the last 16 moths by the way.

All
that selling in fact is the very key as to how this happened.  As it turns out, everyone is not, ahem,
a long term investor. Investors sold all the way down from S & P 920 in
January to that 666 level. Someone of course was buying for every investor that
sold. Those ‘someones’ do not necessarily constitute the same number of
investors that sold. So all that stock is likely held in fewer hand, a smaller
mob if you will. Once all the sellers had been both materially and
psychologically sold out, the buying began. Somehow Adam Smith’s Magic Hand
always knows where to start that process. But with the sellers exhausted, and
substantial stock now in the hands of the buyers, there was no ‘overhead
selling left.’

And
so averages soared. The change in psychology was instant. This is to say the
least, very, very difficult for a person to accomplish. It requires the
opposite of following the herd. One must by when everyone else is selling.  Note that one could have started buying
 at 866 or 766 but the correct point
was in fact 666. Picking the correct level is the tough part.

Already
some are announcing the start of a new bull market in stocks. We doubt
that.   The markets rose from
either 1974 or 1982, depending on the start point, to 2000.  This collapse has been underway from
200 or more recently since October, 2007. So we are not even two years long in a
second vicious correction. Next October will likely tell the tale. Trading in
such a vertical rally is dangerous. 
The move up can stop at any time. There has not been a coherent plan
from Bush Obama on bank bailouts. 
Mark this down as a rally in 
a bear market, no matter what a talking head says on CNBC.  And seasonally stocks usually top after
April 15 tax time, after May go away is the saying.

The
same thing holds true for any market. The time to hire great employees is when
they are being laid off in the oilfield, but that requires a cash hoard
gathered in the previous run-up in price. But like our shrewd stock investor,
the shrewd oilfield company will buy on the way down, realizing how difficult
it will be to start up at the bottom again.

Our
suggestion to be patient has paid off. Crude oil dallied with sub $40 prices
but as the months fell off the calendar, prices rose to the higher distant
months and now stand at $52. Natural gas bounced nicely off the $3.75 level
mentioned here last week. It has risen to $4.42.  It would be nice to see it fall back to a higher low in
price to herald a bottom.  Expect a
correction below $50 in April.

What,
you thought it would go straight up? 
At that point we will see who has the courage to buy oil low at $42 or
so, that is the way to make money, right?