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How the Market Works

That’s Not a Knife, This is a Knife

Posted by kdadmin on June 15th, 2015.

That’s Not a Knife, This is a Knife

Easily one of my favorite lines from the 1980’s came from the scene in which Crocodile Dundee drew his huge bowie knife on the streets of New York and said, “That’s not a knife, THIS is a knife.” If you’ve been living under a rock, there’s a link to the clip at the end of this post.

Last Wednesday, when the market showed a bit of an uptick after four days of selling, Morgan Stanley exclaimed that there was bargain buying in almost every sector.

Um … This is not how the market works.

I wouldn’t consider buying at 2% below the ALL TIM E STOCK MARKET HIGH to be a bargain. I mean, have you ever considered anything that was 2% off to be a bargain? Me neither. You don’t have to be trained in macroeconomics to figure this out.

The act of buying a dropping market is often called, “trying to catch a falling knife.” Think about it, when you try to catch a falling knife, chances are you’re going to get cut. And badly. Now, when you drop a knife, what is your first reaction? You don’t try to catch it, do you? YOU GET OUT OF THE WAY and hope it hits the floor without taking off one of your toes.

In market terms, it’s called being in cash. Which we are.

Have a look at the chart above. Morgan Stanley’s two percent “bargain hunting” is identified in the blue ellipse. That’s Not a Knife. The “true bargain,” from October 14, 2014, is marked in red. During the true bargain, the stock market sharply fell from a high of 2007 to a low of 1864 in less than a month. That’s a 7% drop, during the typically volatile earnings season, with a global Ebola scare, and an impending end to QE3. THIS is a Knife.

Like I implied in my post, Sucker Punch, the current “bargain hunting” is a myth. We’ve been a lot lower, very recently, and we lack QE to stimulate the economy. Further, we’re still below our previous all time high (not to mention that we’re just about even the end of March when I wrote Sucker Punch).

Here’s your takeaway: There is no compelling reason to buy stocks at these high prices.

And for those of you who never saw the Crocodile Dundee film, here’s the clip I promised.

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