The title alone might turn advisors away from reading this book, and when you consider that the author, Benoit Mandelbrot, is a mathematician and scientist, the chances of The (Mis)Behavior of Markets being at the top of your reading list may be small. But it should be high on your list. The book is actually very readable and engaging throughout, and well worth your time.

Mandelbrot's main point is that risk of markets is grossly underestimated. He stresses that markets do not follow the bell curve but rather have many more "fat tails" and hair-raising price fluctuations. Market changes are not uniform grains of sand, he says. They are more like a mixture of sand, pebbles, rocks, and boulders. Some days markets hardly budge, and other days the markets leap a few percentage points.   More 

Technical analysts are always on the lookout for chart patterns and indicators that can provide insight on a market's ultimate direction.

When technical analysts say things like, "If it does this, then this," they are making a tactical statement. I'll use crude oil as an example.

The trend in crude has moved decidedly to the positive side, so long positions are, on balance, likely to outperform. In the event that prices move lower, it's very good to know where support is likely to materialize so that you can quantify how much of a lower price you can stomach. So if I'm trading crude today, I'm going to be buying crude around the $65.25 level (current support) and selling near $74 unless I want to assume more risk and try for a higher price (based on my fundamental view). If prices dip below $65, I'm out of the long trade and can either short futures down to $58 or use that as an entry point for another long position.

This is why I think you can't use fundamentals or technicals in isolation, because the fundamentals provide a good sense of overall value and technical charts show how the price action is likely to play out.   More 

Courtesy of dshort.com, here is another chart that makes the case to be cautious. The pattern of the 1929 crash adjusted for inflation is surprisingly similar to what we have seen since 2000.  (Click graph for larger image.)

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Last week, I spoke to an advisor about our approach to financial planning and encountered one of the most common questions about our clients' portfolios: How are you willing to hold such high cash positions, especially if your outlook is wrong and the markets keep going up? There is no doubt that our perspective on the markets could be completely wrong.  In fact, this is a question I ask myself on a daily basis. An equally important question, however, is what if we are right? What if the markets look more like this? (Data provided by www.dshort.com.)

What is clear to me at this juncture is that there is more fear of missing the upside than fear of incurring a loss. It is not a question of valuations, of long-term historical perspective, or economic analysis. It is the blind faith that markets always go up.   More 

Since the bankruptcy of the Enron Corp. in late 2001, credit rating agencies have come under scrutiny from investors regarding their methods, objectivity, and relevance in an ever-changing investment environment. And while many of the criticisms leveled against Moody's, Standard & Poor's, and Fitch were quietly swept under the rug during the 2003 to 2007 bull run, the spotlight has once again been focused on them and their apparent complicity in the perpetuation of the bubble in structured financial products (RMBS, CMBS, etc).

This latest round of failures has done nothing to improve an already tarnished reputation. However, a recent Financial Times article by Aline van Duyn ("S&P flip-flop sows confusion in CMBS market"), with additional insight from Stacy-Marie Ishmael of the FT's Alphaville blog, noted some especially unusual behavior by S&P related to its rating of several commercial mortgage-backed securities that should cause all investors to reconsider the notion that credit agency ratings are somewhat interchangeable.   More