This year's trend

This quote ran on Minyanville yesterday and got me thinking.

"One of the most striking features of the present chapter in stock market
history is the failure of the trading community to take serious alarm at
portents which once threw Wall Street into a state of alarm... Traders who would
formerly have taken the precaution of reducing their commitments just in case a
reaction should set in, now feel confident that they can ride out any storm
which may develop. But more particularly, the repeated demonstrations which the
market has given of its ability to 'come back' with renewed strength after a
sharp reaction has engendered a spirit of indifference to all the old-time
warnings. As to whether this attitude may not sometime itself become a
danger-signal, Wall Street is not agreed."

-The New York Times Sept. 1, 1929

I disagree that this is the market we are in. To me it seems like participants overreact to each piece of news. Or perhaps more accurately that they have very tight stops and simply are unwilling to sit with a loss of any size. Both good news and bad news are reflected in the stock price immediately. If you are not long when the good news prints you can not expect to hop in and make money. Same thing on the short side.

Lots of people talk about bubble part 2 as if the current prices and PE's reflect the lesson that stocks always go up in the long run. I see the lesson of the bubble as one of momentum. The most money in the bubble years was made by holding stocks while they went up and then selling them only after they rolled over. People made money on both sides of the market by following large multiyear trends. Then as a kicker you had a very steady march higher in 2003 which really reinforced the theme that momentum is simply the best way to trade. So last year was momentum and this year is a wide downward sloped range. Last weeks new DJI low brought out the Armageddon hats and the NASDAQ highs two weeks prior were proof that the range bound year was coming to an early end.

I tend to think this market action is constructive and probably more reasonable than momentum trading over the long run. You certainly still have some momentum stocks working (TASR, GOOG, RIMM...) but not the indices and not stocks in general. The best trading style for this market seems to be range trading with smaller than normal positions and tight stops. With low interest rates and overcapacity keeping profits small throughout the economy is there any reason to expect the financial markets to be handing out windfall gains?