No Hedge Funds, No Technicals
During the October 2008 meltdown the disappearance of active mutual funds and hedge funds was surely felt. I watched my computer screen as the downtrend continued seemingly forever and each and every day as each level was broken without even a modest test. When the hedge fund industry starts withdrawing cash and investing less, the study of technical analysis is almost lost.
Why technicals work
Technical analysis works for smaller traders because they are able to catch on the momentum of the buy and sell orders of the big fish. Hedge funds and mutual funds and other institutions tend to place orders at certain levels on a chart, whether it be a limit order at $12.20 for Yahoo or a take profit set just above the current price. Smaller investors are able to ride the waves that hedge funds create.
Why the technicals fell apart
Institutional cash is rarely private, often it is the culmination of retirement assets of literally thousands –if not millions– of people who are invested in the market. When they start pulling money from the fund, the fund starts pulling it from Wall Street.
When funds enter into a slowdown, they start selling and rarely buy new positions. During October it became quickly apparent that the big money left when previously thought to be strong technical support broke quickly in intraday trading. What little amount was going into the market was being quickly absorbed by withdraws elsewhere.
Traders do have memory
If anything was proven during the US financial bust and bailout it was that the investing community does have some sense of memory. As stocks plunged there was only one value to hold throughout the dip, the 7500 level on the Dow held perfectly. Traders remembered the bottom of the 2003 tech burst and were plenty happy to buy 2008 stocks at 2003 prices.
As we move on through the new year the resurgence of technical analysis should come as money flows back into the stock market. I’m looking for a trendy new year with the major indices sustaining a reasonable uptrend for at least the first few months of the year.
Somehow I share the same thought as yours - Dec 2008 is more or less the bottom and from Jan 2009 onwards it should all be up and up. If the hedge funds always stick to the basic common sense approach of not becoming too greedy and leveraged, I think they would prove to be the catalyst for the much awaited recovery.
I agree deepakrocks, though I do not believe that the rally will last the duration of 2009.
Pumping money into the system does a lot for people with debt, investors who don’t have enough capital and those dependent on government aid. With that said a fresh storm of new cash will do very little to fix the economy. No amount of credit will hire new people, create new factories or produce more for the US as a whole.
We bought ourselves out of this crash just like in 2002 and like we have every time before. I don’t think we’ve even scratched the surface of a multi-decade bull run in commodities or energy.
The country is in a complete financial meltdown really. i think it will take far more than printing a load more dollars.
The problems have been caused by selfish people who just wanted to make as much cash as they possibly could by selling a false sense of security and then selling it on again and again and again and eventually it all collapsed, and then they just leave the rest of the world to pick up the pieces while they sit pretty on their massive profits.
It was a ridiculous thing that these people did and was so obviously going to lead to a massive disaster.