Thursday, November 17, 2011

Stocks drifting aimlessly downwards, but still in a trading range

The usual cast of characters are getting blamed for the market decline, but the simple truth is that stocks are merely drifting downwards aimlessly in a fairly wide trading range, which is what tends to happen when there is not a strong bias either up or down. Right now there is a weak downwards bias due to the various anxieties, primarily the uncertainty of the economic outlook for the next few months. At some point within the next few days we'll likely see a reversal and a bounce, typically after the gloomy talk has sucked in an excess of short-term short-sellers who are in for a fast buck but don't have a deep commitment to longer-term positions. In and out means down and up, which is a trading range.
 
There is an additional short-term downwards bias due to some companies who saw some business weakness in Q3, over the summer and early fall. That short-term bad news psychologically affects short-term traders, but it will take a month or more for longer-term investors to either accept or reject that downwards bias.
 
Despite the media attention, the November 23rd deadline for the joint congressional debt super-committee will essentially be a non-event since across-the-board cuts will go into effect even if they reach no agreement. The details of what of how or why the budget gets adjusted will be essentially moot. The fact that we have a deficit adjustment mechanism in place is all that really counts. OTOH, if the committee does agree to a "Go Big" deal, that could have a much more positive impact on the market, but even then there will not be a large impact on the economy over the next year, so once again it will be relatively moot. It's a great "talking point" for traders, but not such a big deal for investors (as long as something gets done.)

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