The Worst Case Scenario - Part I
January 31st, 2008 by admin
What IF:
- Merrill Lynch, Fidelity, Charles Schwab and everybody else in the investment advisory / money management industry advise their clients that stocks are going to decline substantially from current levels and they (the clients) will be better off in cash for a while?
- Hedge funds announce their intention to short the market?
- CNBC, The Wall Street Journal and the rest of the financial media set off alarm bells by telling their viewers/readers to stay out of the market?
- Financial planners / wealth managers switch their clients’ asset allocations to cash?
The markets are going to crash, because WHO is going to be buying? Pretty obvious - and therefore highly unlikely.
But what is much less obvious (but equally, if not more important) is the simple fact that Wall Street lives off the 1% it charges for managing assets. Pretty simple: no assets - no money. Wall Street is not about to commit financial suicide by telling clients to go into cash because who is going to be there afterwards to tell them it’s safe to get back in? So, in the best interest of their clients Wall Street MUST stay in business by continuing to charge the 1% fee - no matter WHAT the market is doing. In short, it must retain the assets at any cost.
Americans are optimists. Most don’t feel comfortable shorting. They don’t want to hear bad news. Who does? The government does not want to acknowledge it fell asleep at the helm. Institutions do not want to admit they stuffed workers’ pensions with subprime junk. And investors do not want to hear that they are poor. So, here is the worst case scenario:
You will NEVER hear the truth. People are going to be told what they want to hear - namely that everything is fine and that they should stay put by maintaining a long-term perspective. Regardless of what happens.
The global economy is too complex for anyone to be able to read it correctly. Everything is subject to interpretation. There is too much self-interest and enough statistics out there to support any scenario at any given point in time. And they will all sound equally convincing.
What’s the intelligent investor to do? Whom should he believe? The answer is actually pretty simple: stop listening to predictions and follow the market. The tape does not lie because it records actions, not words.
It’s true that the chart only records the past, and you can’t trade in the middle of it. But charts reflect decisions made by humans, and human nature never changes. By comparing the current charts to previously recorded patterns investors can fairly accurately anticipate what is most likely to happen next - without ever listening to a single soul - because it has happened in the past.
To be continued.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com/
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