Be Afraid!

In 1637, a theorem was penned in the margin of Arithmetica-- Fermats Last Theorem. Over the next three centuries the brightest minds on this planet took up the gauntlet and attempted a proof.  If something postulated in the margin of a book in a language understood across the globe regardless of one's mother tongue took over 300 years to prove under rigorous testing and became accepted, exactly how is a problem like the world economy with specific interest to each country going to be resolved in short term, and by politician to boot?

  

We can't solve problems by using the same kind of thinking we used when we created them

--Albert Einstein

That politicians can accomplish anything is stupefying enough, but that they can actually do anything about the world economy, something they have repeatedly shown to be inept at and without expertise of, and in many cases actually participants in destabilizing, is pure silliness. In addition, the belief that the scale of the world economy can be simplified by man into a theorem that can be scribed into the margin of a book to be proved verges on hubris.

That being said, the cover of the recent Economist in a few words, 'Be Afraid' , emblazoned upon space small enough to be in a margin does speak of a proof understood by market participants- contrarianism. In many ways this makes sense because if the belief is that politician have the solution, what exactly is the expertise of these journalist and editors to make such bold claims to begin with? Astute market participants have noted through empirical evidence that when the head lines of major magazines and news papers become apocalyptic in tone about the economy, the market tends to disagree. 

Economist 10/01/11 Cover

 

Taking this into context, I return to where my thoughts left off. Last week I posted a few charts and noted the precarious position of the Russell sitting at the bottom of the range formed since August. Having clipped this low twice in a week and having a recent close below it, I believed there was a high probability this low would break. At the lower end of the range I placed an oval followed by three question marks because even with the weight of evidence suggesting a break to me, nothing is certain. On Monday the low was broken with a convincing 5%+ drop in for the session. A follow through on this was what I expected as the speculative line of least resistance suggested further cascading, however this is not what transpired; and while a pause the following day was not out of the question, a 6.41% pop completely bamboozled me and carried price straight back into the range. 

Russell 2000 10/07/11

On a weekly chart, the SP-500 broke the bottom of its range as well yet finished with a close in proximity to the upper third of the move. I've chosen not to extend the boundaries of the range I defined four weeks ago because I did not want to simply highlight the complete price range into obscurity, but rather emphasize the price move in context over time.

SP-500 Weekly

Looking over the landscape this week what is patently obvious by now is that this is an exceptionally volatile range bound market, with Grand Daddy Dow having 4 moves of 1%+ over the week while Uncle Russell had moves of -5.8%, 6.42%, 1.46%, 2.38%, and -2.61%. With Tuesday commencing earnings season and a couple of key companies reporting thereafter, an important catalyst is in play. Good earnings may turn focus away from the news events that have been a driving force behind the market these past few months. If this begins to look like a poor earnings season, those 3 question marks might be removed..