Monday, April 16, 2012

Glass Theatre Analogy Revisited.

While on the topic of market volume some of you may remember the Glass Theatre Analogy piece I came across last summer and shared in my piece So Where Do We Go From Here? Here is is below as it bears repeating again.


“The biggest problem, getting back to Galbraith, is that in the process of facilitating sellers, all the new technology does not produce any buyers. I know most will disagree with that, but keep in mind that demand is a state of mind. It runs away at the first sign of trouble. Put another way, the same emotions that motivate sellers cause potential buyers to hold off. Sell is preordained, but buying requires a complex greed analysis. Which leads me to my “glass theater analogy.” We are all familiar with the most common analogy for panic: when someone yells “Fire!” in a crowded theater. The problem, of course, is that there are 50 rows of seats, but just two aisles leading back to two doors on the back wall. Grown men and women may trample small children to escape getting fried.

There are a couple of problems extending that analogy to the stock market, so I made some changes in my “glass theater analogy”. The biggest problem in the market is that, even if you choose the aisle seat, last row, you can’t escape unless you can find someone to take your seat. As Galbraith pointed out so many years ago, you can’t be a seller unless someone else will buy. (What a dirty little secret!). Another big problem, considering the speed of the technology today, is the basic transparency. It’s as though the back wall of the theater were made of glass, and all the potential patrons can see what’s happening inside. It’s right there on their screen! Who is going to take your seat when they can see the carnage going on in there? Which leads me back to last week’s mysterious plunge. First of all, remember that reading Alan Abelson the Saturday before the 1987 Crash, he indicated we had already had it with the 230-point drop the week before. The newspapers last weekend sounded a bit like a post mortem too. “The SEC is trying to get to the bottom of it.” I can save them the trouble. What do you expect when your weapon has a seven cartridge magazine in the butt compared to a single load, wad and ball. You get 1000 points in 15 minutes. Wait until the human nature kicks in again someday, in a big way. It might become 5000 points. You could retrace this bear market rally in a hurry."


Caveat emptor.

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