Thursday, March 8, 2007

Heaven Can Wait

Probabilities and outcomes.

The probabilities are (overwhelming so, I might add) that a second wave to the correction that began last week is most likely. That doesn’t mean there is a 100% certainty that it will occur. However, the odds are clearly strongly in that direction.

Now, it isn’t just history that suggests a second wave is likely. Nor is it the added real world factors that I noted in yesterday entry below (1Q07 earnings, for example). There is also the issue of reliable market metrics, such as momentum and MACD, that strongly imply that powerful downdrafts, such as we had last week, are not the stuff of V-shaped immediate reversals. (Note: I will illustrate this point in next Monday’s weekly report.)

Investment Strategy Implications

In the movie, “Heaven Can Wait”, the novice angel pulls the football jock out before the accident, an accident that the jock’s superior reflexes would have helped him avoid. The angel, therefore, violated a cardinal rule: you assess the probabilities and wait for the outcome. Acting prematurely was his mistake.

Unfortunately, for us mere mortals we are compelled to act. Even the act not acting is still a form of acting.

The probabilities of a second wave are strong. The outcome remains to be experienced.

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