Spiritus Mundi

The one word that I have assiduously avoided using in my daily newsletter, Black Box Forecasts is "hope." When we hold a stock, futures or options position that is going against us, I might say that it will take some luck to get us out of the hole, or that we could perhaps use a little more wind in our sails. But for the trader or investor who is faced with adversity to court miracles from the Fed tooth fairy -- even in silent prayer -- is to invite a kick in the groin from the furies. In the trading pits where I cut my teeth, hope is the last refuge of the pathetic loser, the guy who is about to blow out with seven-figure losses, and to lose his livelihood, his home, his Patek Phillipe wristwatch. And in the Darwinian, dog-rapes-dog world of Wall Street, hope is the greased pole to failure.

I mention this because "hopeful" is the word which best describes the present mood of the hundred million Americans who own stock. They are all Fed-watcher by now, and every single one of them is hoping with unseemly ardor for the same thing: a miraculous resurgence of the bull market that made everything seem right with America for nearly a decade. It could be argued that such hopes are not merely pathetic in the way I have described, but dangerously misplaced to the extent they have supplanted reason. For hope, for one, will not tame the electrical-power dreadnought that has begun to squeeze the life from California's economy. Indeed, we should ask how predictions of a resurgent economy later this year can possibly come true when the sixth largest economy in the world is about to get nuked by a massive energy tax, even as business in the state has begun to decelerate sharply due to other, cyclical and secular forces. California's problems aside, hopefulness is metastasizing on an epic scale. To paraphrase Yeats, hope can only coax forth from the bear a gaze blank and pitliless as the sun.

Profit-Taking?

More immediately, Friday's pullback was a textbook classic, so graceful and well-proportioned relative to the previous day's upsurge that we can't help but smell a rat. For bulls hoping that the averages would not get too far ahead of themselves, the Dow Industrials behaved perfectly. A soft opening gave way to a bottom that precisely filled Thursday's opening-hour gap. Thereafter, the blue chip average rallied to the midpoint of the prior day's range, closing down on the day but still well above intraday lows. All in all, it was the kind of activity that most analysts could, and later would, ascribe to "profit-taking." To be sure. But investors take profits for different reasons at different times, and one sensed on Friday that they may not have been quite so confident or sanguine as when they are taking profits in the sunny clime of a prolonged uptrend.

During bullish periods, sellers have the luxury of "averaging up" as they lighten their holdings from lower levels. But in the steep downtrend that has prevailed for the last month, it is not long-term investors who are taking profits, but the relative handful of traders who had the good fortune to have bought near the recent v-shaped bottom. We should give the bull the benefit of the doubt when stocks open on Monday, but if they should become weighty after 90 minutes and dip beneath prices established on the opening, it could turn into a rout. Most critical is 9116 on the Dow, ten points above the March 22 bottom. If the industrials fall beneath that price by more than 30 points intraday, or closes below it, they could fall another 900 points before finding a bottom.