Market Irrationality

Before, the markets were concerned about rising inflation rate and corresponding FED interest rate increase. For the past month or so, the market has rallied based on the notion that the FED will ease sooner than later. Once the FED made it clear that the possiblity of interest rate hike exists due to unmitigated inflation, the market now prices in a rate hike some time in Autumn, and then rallies. Every new "negative" news is spun and recreated with a "positive". All I can say is that the market is now in a dangerous territory. The market refuses to price in the fact that the economy might in fact be headed straight into a recession and worse, possibly a stagflation. So the market rallies on what? HOPE.

If anyone has ever studied the stock market in any detail, it is essentially a mass conglomeration of human psycholgy. That is greed, fear, and worse of them all, HOPE. "Hope" is a dangerous thing. I think they said that in the movie, "Shawshank Redemption". It is clearly so in this case.

The market refuses to price in the possiblity that the economy needs a period of cooling and reevaluation. That possibly that the market needs a little respite. That market corections of 20% or more is a positive thing for the market. Yet the market plunge that started in February 27 was brushed aside. Call it what you will, I have heard enough nonsense about PPT to market corruption. But do we really need all of that to realize that we are in a dangerous territory?

No matter where I look, the market seems to have the genuine ability to spin things. Or, are we setting up for a precipitous fall? I don't know. But the rate of the market rise in light of rather dim economic news, established notion that the corporate earnings will slow or fall in the coming quarters, consumer spending is slowing, housing bubble continues to weigh on the economy (of which the full consequence won't be known until after the fact, no matter how many people have an opinion on this), and inflationary pressures. The last time I checked, the dollar continues to fall in relation to EURO and people have all but forgotten about the YEN and the possiblity of the higher YEN having material impact on carry trades. I am keeping tabs and I do not see anything positive in the near of far future. Not until we have "reset" the market with at least a 20% correction.

Corrections are not all that bad in and of itself. It is a process that refreshes for the next earnest bull run. It is a necessity of which no new bull market has ever started without one. The next issue about why I am so bearish and think that the market is irrational is that we have had an unprecedented run up since last July without a moderate correction. As it turns out, the February 27th drop was a blip and cannot be considered a major event that would satify the 20% correction requirement. None the less, the follow through day that came after the February 27th correction was too short and I still believe that we are treading on unshaky grounds technically.

I have always traded on the bullish side but the parallel leading up to 2000 tech correction is uncanny here. So instead of heeding the market, I stand a contrarian. It is costing me money but I have to learn from history and that is where I will be, a learned student of history. But boy oh boy, do I wish I stayed in cash. That cannot be taken back. I am in too deep at this point to regret. All I know is that I am short and believe more each day that being short is the right decision, no matter the short term pain.