As Of: June 11, 2001
Change Is In The Wind.
Be Prepared!
When an airplane is flying straight and level, all forces are in balance, resulting in a stable, predictable course of flight. If the nose of the plane is lifted abruptly so the airflow over the wings is interrupted, the plane stalls and stops flying. Any well trained pilot knows that when a plane stalls, it loses stability. Instead of just dropping nose down straight ahead as one might expect, the plane will tend to break sharply, either right or left, and typically go into a spin. When a plane stalls, it is difficult to predict the direction that the plane will ultimately go in; but it is easy to understand that the inherent lack of stability will cause a significant deviation from the prior line of flight.
The stock market has recently stalled. On May 4th, the Dow Jones Industrial Index passed through 10950. On May 31st the Dow passed through 10950 again. And today, on June 11th, we find ourselves again at 10950. For about six weeks, the market has stayed range bound. It has been a good period to sell options and collect the wasting time premiums. But like an airplane that has stalled, the market is suffering from instability and likely to break in a new direction. Various arguments can be made as to what the new direction will be, but I see no convincing evidence to tell us for sure which argument is correct. (My bias is that the markets are headed down.) The message of the day is not that there is an identifiable new direction. Today's message is simply a warning not to be complacent. The current instability in the market is likely to result in a change. Be prepared!