[Post Summary]Catch us the foxes ... that spoil the vines.
—Song of Solomon
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Five of seven technical analysts regularly appearing on CNBC's Fast Money currently are bearish toward the stock market, this while major indexes sit at relatively distressed levels. This is noteworthy because technical analysis is said to transcend fundamental conditions making for much media hype. What's important to technicians is not news, but rather the composite reaction measured by the buying and selling of shares, generally, and its impact on relative conditions quantifying the market's state. This provides basis for forecasting the market's likely path of least resistance over some future duration.
The value of technical analysis is a bit like limiting the field of possible winners in a horse race using the odds placed on each horse to win. Every bettor has come to some conclusion leading each to place their money on a particular horse. The composite of these bets is reflected by each horse's win odds. Now, here is where it gets interesting. 70% of winners in horse racing go off at odds of 5-1 or less. In other words, winners typically receive a good share of bettors' money. Thus, generally speaking, you can say the bulk of people who bet on the winning horse employ sound, fundamental reason for making their decision. That many people bet on winning horses is shown by the fact 70% of winners go off at odds of 5-1 or less. That betting decisions are made using sound judgment is shown by the fact many people typically pick the winner.
A technical analyst similarly is concerned less for the reason a bet was made, and rather assesses composite decisions real people (possessing reason) have made in the act of managing their investment money. The technician trusts that, the collective rationale for the greater bulk of investment decisions is predicated on sound judgment. This assumption forms the foundation of thinking used to assess various measures quantifying the market's relative state. Conditions affecting these measures reflect the collective judgment of all vested interests.
Collectively, human beings tend to do what others do. And those that are investors collectively behave like lemmings. As such, then, when all lemmings have jumped over cliff's edge, how many are left to jump? Now, the dynamic involved in assessing whether all lemming investors have leaped over the edge is complex to the point of being impossible to say with perfect certainty. So, when five of seven technical analysts claim there are more lemmings yet to jump over the stock market's edge, you are wise to question their consensus. They are, in fact, casting judgment on something impossible to say with such certainty as their consensus suggests.
In the game of investing when judgment finds consensus, more times than not the consensus proves misguided because its very existence becomes an opportunity ripe for exploitation. That's because the shortest distance between two points is not a straight line. It is the path of least resistance.
Investing is all about making money. This requires staking your claim ahead of the trend, be it up or down. A trend is made as growing numbers of unbelievers in the trend's direction are made into true believers who vote with their wallets. This requires a deep pool of prospective marks. Assuming five of seven technical analysts are voting with their wallets their belief the market will decline further, who is left to follow their lead and help extend this trend? Truth is the five bearish technical analysts stand as fine candidates awaiting persuasion the market's pending trend is, in fact, higher. Once they are convinced by a move contrary to current expectations, their collective actions to get on board stand to further drive the market higher, creating the effect desired by those who, right now, are long the stock market, recognizing the bearish camp's vulnerability to changing its collective mind.
—Tom Chechatka
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