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Morning Review - 082510

Morning Review - 082510

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Published by pdoor

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Categories:Types, Business/Law
Published by: pdoor on Aug 25, 2010
Copyright:Attribution Non-commercial


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Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.comChristine Clark: 212 448 6085 or cclark@convergex.comBeth Reed: 212 448 6096 or breed@convergex.com
So what do you do to help avoid jams? Keep your distance from the car or truck in front of you.
That gives you time to slow down deliberately, rather thanmashing the brakes and causing the cars behind you to stop short and create that “pressure wave/jamiton.” An impassioned appeal from another amateur follows:http://www.skaggmo.com/newsletter3a.htm.
We’ll finish off this note with a few observations about what this stocks-are-like-traffic-jams comparison means to investors and traders.
The most importantpoint is that jams – or market drops – seem to happen when everyone wants to go in the same direction (high correlations between asset classes). Jams occur once thatstage is set because a relatively small number of participants do something unexpected. They can, in short, have a disproportionately large effect on the entire system.And – worse still - if a lot of people slow down at once, the system grinds to a halt. That feels a lot like what we have right now. Mutual fund outflows from domesticstock funds are effectively the retail investor putting their foot on the brakes – something they have been doing for 15 weeks straight. Combine that with plenty ofdistracting scenery in the form of lousy economic data and the jam gets worse.
One thing all traffic jam experts seem to agree on: when the chain reaction that starts a jam really kicks in, only time will unwind it.
And that seems like themost accurate comparison point to stocks.

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