Mumbo Jumbo

Now I am not an expert in technical analysis but I definitely have an amateur status and have been fascinated by application of Fibonacci series in markets. Though it does not have a cause-effect relationship, it is followed by a certain category of day traders and, who knows, might also be incorporated into algorithmic trading systems.

Here I have tried to compare the recent recession and the dot-com bust. In Mar 2000, S&P reached a high of 1552 and touched a low of 768 in Oct 2002. It took roughly 31 months for S&P to drop by 784 points (50% from high). At the start of current recession, S&P touched a high of 1576 in Oct 2007 and touched a low of 666 in Mar 2009. It took roughly 17-18 months for S&P to drop by 910 points (58% from high).

Now the latest short-term high of S&P is 1227 which was reached in Nov 2010 but S&P was first close to this level (1220) in April 2010. From a low of 666 to high of 1220-1227, S&P has thus recovered ~62% (remember that guy Fibonacci) of the previous high-to-low drop (i.e. S&P has recovered by 560 points = 62% of 910 points) in 14 months. During the recovery from dot-com, S&P took 37 months to recover 62% of the previous drop and while it continued to rise higher from that point to next high in 2007, saying that S&P is bound to rise higher from where it is now would be too arrogant.

Point to note is that during the current recession both the drop and the rise took relatively less time which, I think, is another measure of the volatility in the markets. High leverage, a lot of money following limited number of strategies or minuscule profits and high correlation are responsible for this volatility.  If I were a hard-core Fibonacci believer, I’d predict that the markets would hover around the current levels for next 3-6 months and then we could see an upside when all the surplus could really start to have some effect. Though I am not ready to invest based on this analysis since I have joined the Graham and Doddsville University of value investing and am determined to follow that path now.

I can not say for sure that financial crisis has made smart money smarter but I definitely believe that the quant PhD camps are on to devising the new high yielding vehicles. Heard of mortality swaps?

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