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Are We Having a Blowoff?

Posted by Larry Doyle on November 16, 2009 11:24 AM |

Blowoff“If you can keep your head when all about you are losing theirs…”

Retail sales rebounded strongly this month posing a 1.4% gain. Good news, right? In an attempt to provide a degree of sanity to what has become an extremely volatile report, let’s break this report down a little bit further.

Recall that our automotive sales have bounced around tremendously over the course of the last three months due to the Cash for Clunkers program. Auto sales soared in August given Uncle Sam’s handout. Once Uncle Sam shut that spigot off, auto sales dropped like a stone in September. In October, auto sales had a respectable bounce. All this said, there is no respected economist who doubts that the Cash for Clunkers program pulled demand forward. In the process, it has skewed the overall retail sales readings. What is the American consumer doing away from the auto sector? Let’s navigate.

Retail sales ex-autos posted a 1.0% increase in August, a .5% increase in September, and a .2% increase in October. That trend line does not look all that positive to me. Against that backdrop, holiday sales for retailers remain a major concern.

The retail concern combined with issues within housing and labor present major hurdles for our economy, but apparently not our markets. What gives? Our equity markets seemingly discount all bearish news and rally higher on any hint of positive news. Is this rational behavior? I am no psychologist or psychiatrist, but it strikes me that our markets are entering into a dynamic not commonly seen but not to be discounted. What is it? Welcome to a blowoff. What is a blowoff? As our friendly Investing Financial Primer indicates:

This large and dramatic price movement is generally seen at the peak of a market or stock. The idea behind the bearishness of a blowoff is that it signals the activity of the most irrational and overly exuberant market participants, who, wanting to take part in the rally, momentarily push up the already-overvalued stock.

What is likely to happen in a blowoff? Expect an increase in the number of solicitations from brokers and financial planners to get into the market. Expect stories of quick and easy money to flourish. Expect day trading ads to become prevalent once again. A blowoff can occur over a protracted period.

What is one to do? Keep your head. In fact, is there ever a time when one should lose his head? Of course not.

The virtues of discipline, patience, thrift, focus, and family never go out of style although they do not necessarily align well with those who would solicit  active trading and investing based on positive price action in the markets.

Thoughts, comments always appreciated.


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