As I posted earlier today, the spike in the markets seems to be based on the overnight spike in the Euro, which despite renewed concerns in the Euro-zone-specifically Ireland's ability to service its debt, was sharply higher overnight which I personally believe was specifically caused by PIMCO's Bill Gross coming out last night saying the dollar could fall 20% -when Bill speaks, the market listens. Other then the gap up, the market was largely range bound in a lateral trend, much like the Euro was from about 10 a.m. to the present. Yesterday we had a market that could not hold its gains, today we had a gap up and a market that traded pretty much sideways the rest of the day.
Regarding Bill Gross' interestingly timed dollar analysis, as we have seen in the recent past, some of these big-time fund managers have come out to pump the market (GS and other firms as well) for their own personal reasons, like the end of quarter reporting to their clientele to prevent client losses and redemptions. When these people speak, a healthy dose of skepticism is reasonable. There are very few that come out with consistently correct analysis and those are usually people looking to climb the ladder from a job with a Wall Street firm to a fund of their own like Meredith Whitney, but these people are few and far in-between. In fact, since Meredith went out on her own, her record has been tarnished with about 2/3's of her stock picks significantly under performing the market. This is nothing new. If you read either of the "Market Wizards" books, it's full of traders that went from one level of success to the next in which they seem to self destruct. Wall Street actually has psychologists that are there specifically to help traders overcome ruts the fall in occasionally. I remember a story about a trader that could take $5k and turn it into $100k in no time at all, but could never break the $100k level and just self destruct. Ed Seykota's "Trading Tribe" has devoted a lot of time to this phenomena and he's had a lot to say about it-it's worth reading what you can about him.
There's really not much to analyze at this point as the market is going to react to the elections and more importantly the Fed's decision regarding QE2 on Wednesday. If you've been around awhile, you know there is a thing called the "Fed Effect", I've documented it on nearly every single Fed announcement or FOMC decision. It may be better summarized as the market knee-jerk effect. Information like an announcement from the Fed comes out and the initial reaction is reversed somewhere between intraday and a couple of days. I personally feel this has more to do with institutional set ups rather then the market taking a second look at the information.
So this will be an interesting and most likely a volatile week as we have two major events. To try to guess what the market will do is exactly that, a guess. Sell the news? Buy then sell, sell then buy? It's really impossible for us to say beyond what we already know-negative divergences, insider selling, foreclosure crisis, declining GDP trends, rising unemployment (real unemployment as documented in the U6 report), bubbles crating bubbles, etc.
If you were to leave the market or the planet for 3 years and came back today, I think you'd be scratching your head wondering “why is the market where it is considering our economic situation and the world's economic situation?" I think it would be bewildering to try to understand the multiples certain stocks and market averages are trading at when you look at the MACRO economy and all of the issues cropping up day after day. However, in the last 3 years, a LOT has changed in trading the market. High Frequency Firms, massive Fed intervention, Dark Pools, Black box systems, a collapse of retail trader participation in the market, etc. The Internet age changed a lot
So I'm not going to venture senseless guesses as to what a senseless market will do. If history is still our guide (and it's always a story from the talking heads “it's different this time”) then the market will return to the median and then swing as irrationally in the other direction as it did in the first.
Many things that seem inexplicable happened today-the market jump in after hours is not really one of them. Consider the market's relative trading range intraday all day today, then when it closes the after hours trade immediately jumps-reason, there's no volume in after hours-in fact there's very little volume in regular hours trading. One thing is for sure, institutions don't wait for after hours when there's no liquidity to pay a lot more for a position they could have had for a lot less 5 minutes earlier during the trading day-I think that's common sense. The question is, what's the game? Pump the futures and fade them like yesterday?
Early this morning, as reported by Benzinga.com, there was a huge imbalance in the Put:Call ratio, skewed heavily to the put side, meaning someone is not too confident in the market or doing some serious last minute hedging. OR....?
PIMCO was selling both, 3C was showing the negative divergence-meaning distribution which occurs into higher prices, not lower.
These are some of the misconceptions market participants have had for decades, such as institutional money is buying on big volume spikes and hefty price moves, when in reality they were buying when no one had any interest in the equity. The volume and price advance are there way of attracting retail money and as retail money buys and the equity heads higher, institutions are selling to retail, but traders still believe that it's smart money buying during this stage 2 mark up. The same way they believe that institutional money is selling during a bear market decline, wrong, they have been out a long time before that and are short the decline. It's these misconceptions that set traders up for the manipulation that leaves them ultimately holding the bag.
In much the same way, GS or Pimco or some other firm comes out with free advice or Cramer pumps a stock and people fall for it every time. These people don't pay tens of millions of dollars on research to give it away for free and people like Cramer have relationships that are a lot more important to them then the relationship he has with his nameless/faceless viewers.
So if you have your risk management straightened out, the only thing to do now is wait for the markets first volley of misinformation and misdirection, then to see the real trend unfold.
Personally I believe the election is a known event, to much of Wall Street, I think the Fed's decision is a known event and has been discounted and the game board has already been set up. I think there's very little that falls into the “unknown category” such as 9/11 type events or the timing of the start of a war for obvious reasons.
So tonight's post is going to be rather short as much of what is pertinent would simply be unnecessarily repetitive. You can always email me with specific questions. I like the emails from people telling me they held MSPD and have now been lavish-lied rewarded for their patience and good risk management that allowed them to wait the trade out-keep those emails coming and keep in touch with me about stops on positions like that, now you have moved into the realm of trade management which is just as important as the entry or the stop. You don't want to give up gains, you also don't want to lose profits. There will be pullbacks and retracements in trades like that, but making objective decisions regarding your stops re essential, especially when you consider the alternative of an emotional decision which is based in nothing but fearful speculation.
Don't forget about the recent trades highlighted and to set alerts or email me regarding specific plans that work for your trading style. Financials are certainly high on the list of short trades, even today they performed badly, many closing in the red as evidenced by the banking index (BKX) down on a day like today. These are the trades you want to be paying special attention to and looking for opportunities to short into strength.
Right now, it looks like the election is going largely as expected. Voters have their say tonight, the market will have it' say shortly.
If anything interesting should change tonight, I'll be sure to update the site tonight.
