from weak hands to strong hands

It took me a while to come up with a description I’m satisfied with to write about what I think is going on in the current stock market.

Three major impediments/distractions for me:

–in the old days, when, as they say, men were men and giants roamed the earth (notice, I didn’t say the good old days), what drove the stock market was the four-year election cycle. We’d have 2 1/2 years of up, and a presidential election followed by 1 1/2 years of down. Sometimes it was 3 years of up, 1 of down. The sitting president would arm-twist the Fed into lowering rates in the runup to the election, putting the economy into temporary overdrive, and then clean up the mess this made in the new administration.

We really haven’t had the kind of ugly market we’re now in since 2008, though, so we’re all out of practice with the idea that stocks can go down as well as up.

–the selling seems to me to be heavy-handed. By that I mean downward pressure is not thrust/counterthrust but a relatively unsubtle straight down. My guess is that the major players are computers, but that’s a secondary thought. The result has been, I think, that potential buyers no longer anticipate intra-day counter-trend rallies, so they’ve more or less left the field to the selling robots. They in turn have doubtless been trained to push prices aggressively lower until they hit buying resistance. As a result, even a whiff of selling can cause a significant price drop.

I think this makes stocks fall faster and farther than they otherwise would. But this is the world we live in today. I imagine this implies an explosive rally at some point. Since I have no clue when this might be, it’s cold comfort.

–press commentary is unusually inane. I read a Bloomberg article earlier today, for example, that implicitly compared today’s situation with Wall Street in 1929 and Tokyo in 1989–both events that marked the onset of decade-long+ economic contractions.

the hands thing

I don’t think this selloff is about macroeconomics or about global or national politics. If the 10-year Treasury is going to be at 3% a year from now, or even six months from now, the PE on stocks should be around 33x. Today’s PE is about 25x.

But prices don’t just reflect the more-or-less objective characteristics of companies an economies. They also reflect the hopes and fears of the investors who hold them.

One way of sorting investors: a group that has extensive knowledge of the companies whose stocks they hold and their prospects. They’ve read the SEC filings and the financial press, and may even have made detailed spreadsheets projecting future earnings. These are strong hands. Then there are owners who have bought the stock on a whim, or because of a tip from a friend or a tv commentator (probably without Googling the the talking head to get a bio). Anyway, these are weak hands.

I think that the current extended selloff in the market is essentially a psychology-driven movement of stocks from weak hands into strong. Fear overcomes greed and low-conviction holders, seeing losses, elect to sell rather than risk further declines. Often, this ends in a selling climax, a sharp decline on high volume during which weak hands sell their remaining stock. We may be nearing this point now, but I find I’m not yet thinking about hiding under the table, so a climax may be a ways off (unfortunately).

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