December 10, 2018
| Rock N’ Roll Market – Wise Guy Feast! |
Did you ever see the film about the alligators that live in the Mara river in Kenya waiting for the Wildebeests to make their annual migration? In order to get to better grazing, the Wildebeests have to cross the river. Well the river is populated by probably a jillion alligators who sit and wait as long as they need to for the migration. When the Wildebeests finally show up, the alligators stuff themselves so much that some of them won’t eat for close to a year.
After months of no volatility the wise guys gorged on the price swings last week. It is this kind of market that drives retail traders and investors nuts. They own good companies such as Apple and Amazon, so they are put to the test. Do they take profits or do they ride the temporary downswing knowing that since it is Apple it is only a matter of time until the stock begins to rally again? The truth is they are probably right to hold, but my question is with so many tools available to hedge their risk why don’t they take a little time to learn how to protect their investments?
When you are a wise guy and you have to take the other side of a trade you learn that you must know what your opponent is doing in order to survive in a market like we have seen since the end of September. So the boys develop tools that allow them to not only stay in the market, but to thrive on it. They are just like the alligators, they know the market is not going to announce itself, so they must always be prepared for the extremes that happened this week.
If you listened to the media the problem was there were too many sellers, and they controlled the price. Part of that conclusion is correct as the strong hands this week were the short sellers. But the other part of their assumption is pure baloney. All U.S. markets are auction markets, which mean that there must be a buyer for every seller and vice versa. What really happened was that the sellers were willing to take less for their equities and the buyers kept lowering their bids, probably averaging down. In the end, last week saw the sellers win the battle.
Where do we go from here? Interesting question. Historically, the last two full weeks of trading are known as the Santa Clause rally. There are many reasons for the rally to occur. Tax swaps, repositioning for the new year, whatever. Generally the market drifts higher on light volume. I think Santa will still show up, but this year he may have had a little too much egg nog before he hopped on his sled. We are at key technical support levels and if they hold look for a sharp rally, not a gradually one. If they fail the last two weeks could turn into a rout, only time will tell. Let’s hope Santa doesn’t have too much egg nog and fall off his sled!
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
What is Volatility and how does it affect my portfolio?
Investors know that volatility exists but how is it calculated? Is there a formula that is used to determine how much prices will fluctuate over any given period or is it just a guesstimate? Volatility is calculated as the rate at which the price of a security increases or decreases for a given set of returns. It is derived by calculating the standard deviations from the current mean. To the average investor that definition doesn’t mean much but if you watch your portfolio you should notice big changes when we are in a high volatile environment versus those when volatility is low. 2018 has been a challenging year for equities. Last winter volatility went through the roof, but after a few disquieting days it gradually sunk back to multiyear lows. That has all changed of late as fear has reentered the market and we are getting big price swings. As a rule, volatility will go up when the market is breaking and will be down when it is rallying. Right now, we are breaking and it is a scary world. We have had a nine-year rally and at some point it will reverse and the cycle will start over again. As long as your portfolio is balanced, and you have taken some steps to hedge your risk volatility can be an opportunity. If not, you are at great risk and need to learn how to avoid it!
The Wise Guy Report: The View from The Electronic Floor
Each week I talk about how the Wise Guys (floor traders) find the soft spots in the market and take advantage of price dislocation in three major commodity markets: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). On the equity side, I cover MSS which is the Mister Seifert Sez Composite Index. This is a proprietary index that I created which measures the dollar flow of the four major indexes (S&P 500, Nasdaq 100, Russell 2000 and the Dow Jones Industrials) on an unweighted basis. Let’s look at how the Equity markets are faring.
Head And Shoulders Chart Formation Still In Play (Volatile Congestion)
U.S. equity markets which have been the worldwide leader this year now seem to be looking for direction. The markets, particularly the DJIA are making a formation that is known as a head and shoulders pattern. This generally occurs when the market is going to change direction. In the case of the DJIA, it is a secondary pattern as the tops came in several months ago. I would look to do the following. If we rally above the head, it is definitely a buy signal and I would look for Santa Clause to come in and save the day. If we break the neckline and head south I think we could get a large move to the downside. The increased volatility indicates that the market is looking for a longer-term direction. Markets like this are tough to call but I think that we will get resolution in the next ten days. In any case the action should be good!
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