Earlier this week Altitrade Partners™, located just outside of Denver, Colorado published a report warning investors not to ignore many of the historical signs which indicate that we may be nearing an important juncture in the stock market. The four most dangerous words for investors are “It’s different this time” said a spokesperson for the firm, which engages in proprietary trading, investing and research, with an emphasis on small caps, micro-caps and special situations.

There are a number of technical and fundamental indicators which we follow that are showing us an increased likelihood that some sort of pause, or correction, may be in store for the markets in the short to intermediate term. We would expect many of the well-known indices, and the investment products that have been created to replicate them, such as the SPY, DIA, QQQ, and IWM to be most affected; simply because of the large institutional ownership of them.

The report titled “Investors Are Playing Musical Chairs, Where Will You Be When the Music Stops?” draws an analogy to the childhood game of musical chairs. “In our view, the probability of a 10-15% correction far outweighs the additional upside in the market of perhaps another 3-4%” according to the report.

Every new data point that confirms an historical precedent is like another chair being taken out of the game. Soon all the underpinnings for the bull case are eliminated one-by-one; leaving investors vulnerable to giving back gains earned over the past five years.

The report, which has also been published on the Seeking Alpha web site, can be found by following this link: http://www.altitradepartners.com/Altitrade_Partners/Reports/Reports.html

Altitrade Partners™ also goes on to address some of the psychological indicators that they view as being important to understanding investor behavior, and how that behavior influences the financial markets. Investing is more than just paying attention to fundamental and technical factors. You must also understand human behavior, the report states.

We have a saying around here that “the markets are simply emotions in motion”, and if you understand human behavior and market psychology, we think that it makes you a much better investor.

Simply put, there is far too much investor complacency in the markets right now, and that causes us to be concerned. It seems that investors have lost their regard and respect for equity market risk. What we may be experiencing, in the markets right now, is the proverbial calm before the storm.

Seasonal tendencies may also point to increased risk for market participants. If you look at the volatility index, or VIX as it is better known, historically there is an increase in volatility in the months of August, September and October, said the firm’s spokesperson.

Long-term success in the stock market is about protecting your gains and assessing the probabilities, in percentage terms, of the market rising or falling. When you see a sign today, that in the past has produced an outcome which occurs 80% of the time, you had better pay attention to it. When you begin to see three or four such signs, it makes you sit up and really take notice.

At Altitrade Partners™ that’s what we are observing in today’s market environment. We’re seeing multiple signs that, taken in their past historical context, have foretold a significant change in market direction. While we are not in the business of predicting, we are in the business of preparing and protecting capital in our trading accounts. We don’t know exactly when the market will experience a correction, but like all good baseball managers, we will play the percentages when they are clearly in our favor.

 

The opinions expressed herein, are exclusively those of Altitrade Partners™. We do not provide investment advice, and do not offer buy and sell recommendations on any securities mentioned in our reports. For additional information about Altitrade Partners™, including our full disclaimer, we invite you to visit http://www.altitradepartners.com/Altitrade_Partners/Disclaimer.html

 

 

 

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