Link: “Welcome to the Bizarro World”

Aug 14, 2007: 10:13 AM CST

Larry Connors recently provided his observations on the current market climate in his compelling, yet interestingly titled post Welcome to the Bizarro World. Larry provides not only a brief overview of the ‘strange situation,’ but provides five key strategies for you to consider to help you prosper in your individual trading.

He attributes the recent decline to the rapid unwinding of hedge fund positions that were heavily leveraged (in some cases, up to 20 times capital). These hedge funds were betting that liquidity had eroded from the market (a fair assumption) and were thrown violently off guard when it returned.

I was happy to read that Connors is surprisingly more positive than many of the other articles assessing the current situation.

Testing by his firm has revealed the following information:

1. This has only been the fifteenth time since 1995 that the SPX has dropped 2% or more 3 times within a month. Of the 14 times it’s occurred before, 13 times the market was higher one month later. The average one month gain for all times was +5.10%.

2. The VIX has been stretched (on a closing basis) 50% or more above its 50-day MA only 21 times since 1995. The market has closed higher 20 of those 21 times one month later. The average gain has been 4.88%. Incredibly the VIX has now closed 50% higher than its 50-day MA three more times since late July, the last one being last Thursday.

I just had to share Connors’ positive closing statement for some encouragement:

“But, if things do go back to order, we’ll look back years from now and say that the summer of 2007 was one of the more exciting times the market has seen. And we may also say that it created one of the better opportunities of our time.”

Thank you to reader Eddie Kwong for bringing this article to my attention. Feel free to let me know of any articles or post you find insightful to you.

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