BiPolar.

That is the only way I know how to describe the market action of late. The week is likely to end flat — no losses or gains — but it sure didn’t feel that way.

Markets have just lived through 4 consecutive 90% Trading Days. That is a session where 90% of the stock trading volume and the number of advancers versus decliners is to one sided. These 90% Days are defined by their extreme intensity. They are typically associated with panic selling and on occasion, panic buying.

Four consecutive 90% Days is extremely rare, and according to Lowry’s Technical service, this week was “only the second time since 1940 that four consecutive 90% Days have been registered.” Floyd Norris of the NYT found 3 instances of consecutive 4+% swings.

And most unusual of all, there is no historical precedent where we had four consecutive 90% Days that saw each reversed in the next trading session, i.e., Down Up Down Up.

The technicians will call this high volatility, but to me, its merely a case of BiPolar behavior. I would note the following five observations:

1) There is no clear trend. Anyone who engages in trend trading is likely out of this whiplash environment. Why guess when you can wait for a better defined trend line?

2) A 1% muddle through economy has been discounted is mostly priced in at a 20% drop in prices; Even a mild recession is mostly in the price. However, a serious recession, where earnings fall 30-40%, has certainly not been reflected in prices yet.

3) Market have become extremely oversold. Not quite January 2009 levels (which fell further) but at least to Flash Crash levels. A bounce over days or weeks is increasingly probable.

4) The possibility of more eventual selling exists: The short time window makes unlikely that this is the last of the selling; we have adjusted downward and now await further data about European banks and the US economic slowdown.

5) The downgrade of the US from AAA to AA+ is likely the first domino to fall; look for further downgrades to major European states, and the ECB itself. What matters is not the downgrade but the reaction in the markets.

The question that you must ask yourself: “Are you a trader or an investor?” will determine if you should be playing in shark infested waters.

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