Quote from Sponger:
Support suddenly becomes resistance - that's trading 101 - and we calmly debate support and resistance on ET because its easy to do.
The one thing that I see missing in this discussion is the psychology of the markets breaching these support levels. The speed and violence of these recent downdrafts could be causing adverse psychological reactions in both retail and professional traders alike. What should be a much needed correction could turn into something far worse that feeds on itself.
The variable that makes me worry is that a whole generation of babyboomers is relying on their 401K and IRAs to live off of in the coming not-too-distant years. They could create panic selling and drive things even further - regardless of what the economy is doing or not. Its easy to say all is well - try telling that to people whose life savings is vanishing before their eyes. I don't think we are giving this enough credit in this discussion.
Does anyone think we could see panic selling by the babyboomer segment?
Yes.
And your sentiments echo mine almost exactly.
Psychological mood is always exaggerated on the up and down turns.
Demographically, there a lot of baby boomers, close to retirement, that have nice nest eggs they are relying on to get them through their golden years. A circular and vicious move down may rattle their confidence to the point where they wish to remove almost all risk out of their portfolio, until a clearer and more stable picture evolves, at the very least.
By shifting from, say, equities, and rebalancing into a heavily overweight position in fixed income instruments, any downward move is greatly exacerbated.
At a time when fixed income in paying 5% to 7%, a nasty downward correction in equities, of the kind we haven't seen in 4 or 5 years, is entirely plausible. And its root cause would be benign relative to the causes of other recent plunges.
They won't listen or care about historical lessons regarding equities outperforming bonds over the long term, because their time frames are too short to risk precipitous drops in equity markets - that they haven't a clue would take how long to recover from.
They won't care about economics 101, emerging markets, or the next great thing. They won't care about Siegel, Kudlow or goldilocks.
They'll just want to avoid losses, and avoid risk.
