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Dorn: Abracadabra! ... A Little Market Misdirection

Monday, 8 Sep 2008 | 7:38 AM ET

On Friday — whilst the employment numbers were being dissected like a cadaver, and traders were puking in revulsion because Armageddon was at hand — behavioral traders were looking where others were not.

We noted the steady climb of Fannie and Freddie since August 26 and the recapture of the 50 day exponential moving average on the Financial Select Sector SPDR () by Friday's close. We also marveled at the acrobatic contortions in the foreign exchange markets beginning after the close on Thursday where there was a wild west atmosphere rivaling the gun fight at the OK Corral. Between Thursday night and Friday morning, the euro circumnavigated a stunning round trip of some 600 pips, leaving much carnage in its wake.

This chaos and confusion are best explained by uncertainty driven by the migration of rumors through the markets. Rumors are amorphous with no clear end or beginning — but they eventually reveal themselves as truths or imposters. The revelation came in the form of one magical word: Backstop. Abracadabra!

First you see Fannie and Freddie fading into the darkness, and then you see them creeping steadily upward and ending up dangling like a worm around the middle Bollinger band in after-hours trading on Friday. Collaboration between Criss Angel and David Copperfield could not have rivaled this spectacle.

No one knows exactly how this will end since, as with so many acts of magic, more will be revealed in the passage of time. Thus, as many market participants were contemplating the end of the world as we know it, the indices were steadily creeping up into positive territory until the magical word appeared to provide the ever-illusive and always-required “why?” The market knew this a week or more ago, and showed its intentions to those who were not otherwise occupied with tropical storms, prediction mania or political convention fever. There could not have a been a better week to stage this, because too many people were looking somewhere else.

Behavioral traders anticipated it, and we now believe that there is likely to be a positive response to the backstop story. This is likely to provide an upside respite of several days to a week before magic show is over, people slump out of the darkened theater and stagger, squinty-eyed into the harsh daylight of reality.

By Abracadabra, we signify an infinite number of things. ‘Tis the answer to What? and How? and Why? and Whence? and Wither?
‘Tis a word whereby the truth ( with the comfort it brings) is open to all who grope in the night, crying for wisdom’s holy light… Ambrose Bierce, The Devil’s Dictionary, 1911

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Janice Dorn, M.D., Ph.D., is a financial psychiatrist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. She also offers trading consulting and coaching services via her Web site, TheTradingDoctor.com.

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