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'Big-Picture' Thinking Will Get You Squashed

Rev Shark

"There are people who, instead of listening to what is being said to them, are already listening to what they are going to say themselves."

-- Albert Guinon

Market participants often feel that it is necessary for them to form broad theories about where the market is headed. They postulate how interest rates, the Fed, foreign exchanges, macroeconomic factors, energy costs, housing and a variety of other factors are going to drive the stock market one way or the other. The arguments are often superb and the logic compelling. There is something about "big picture" predictions that is very enticing for many market players. The media promotes them constantly and at social gatherings it is usually the focus when talk turns to investing.

The problem with this inclination to form major market predictions is that there is a tendency to ignore what the market is telling us. We are so intent on looking for evidence to back up our existing theories and predictions that our minds are closed to the messages that we may find in the daily action.

Right now it is particularly important to be attentive to the market's messages. We are clearly struggling but things are neither as bad as the bears proclaim, nor are we as close to a recovery as the bulls might hope. The truth of the market is always somewhere in the murky middle and if we spend too much time developing grand theories, we will likely miss the message contained in the daily market action.

The market message yesterday was quite clear: folks want out. The manner in which last week's bounce was sold was classic, and is exactly what you'd expect to see happen after a sharp drop and an oversold bounce. The selling yesterday was more sudden and intense than you might expect but it should come as no big surprise that we are close to retesting the lows we hit last week.

The key now is seeing how the market deals with nearby support levels. Can we hold and build a base of support or will it serve as just a minor level that will turn into future overhead congestion?

If you stay patient, and watch, look and listen to what is going on, you will be in much better shape for a profit than those who spend their energy forming theories about the big picture.

We have a little bounce to start the day. The big news will be the minutes of the last Federal Open Market Committee meeting that will be posted at 2 p.m. EDT. Market participants are hopeful that they may get some increased clarity about where the Fed is headed, but if you've been listening, it should be obvious that even they aren't sure at the moment. The next meeting of the FOMC is about a month away and the economic data during the interim will be the key factors driving their future interest rate decisions.

There isn't much market moving news on the wires this morning. Merrill Lynch is cutting its target prices on Google (GOOG Quote) and eBay (EBAY Quote): Google to 490 from 540, and eBay to 44 from 51. Goldman Sachs is positive on gold and increases its estimate to $700 from $650 in 2007. The Nikkei was down sharply as mining and commodity stocks wee pressured but European markets found their footing as banks and financials lead.