Wednesday, February 20, 2008

State of the Market - 2/20/08

The stock market continued its bi-polar tendencies today, as higher inflation readings(hard to believe, huh?) caused a big move lower in the beginning of the day. The indexes remained lower and in a trading range throughout the morning until around 12:30, when the markets dramatically shot straight up in about 15 minutes to go positive on the day for no apparent reason – no news events were tied to the move. Hey, why not, right? The markets stayed higher in the afternoon, but not without some quick swings up and down. The markets closed with some good gains and volume did increase over yesterday. Small caps were up more than the big caps. As bearish as yesterday was, today was just as bullish. However, we still haven't had a clear breakout from this triangle we're in and today actually touched both sides. Perhaps closing bullishly leads us to an upside breakout. I just don't know. How long can we go before we breakout one way or the other? Hopefully we won't have to wait too much longer to find out.

Dow

S&P 500
Nasdaq
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I read an article summarizing the Fed minutes today out of curiousity for what might have caused the reversal and afternoon strength. These are some of the things that stood out:

"With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action," minutes of the Fed's Jan. 29-30 closed door meeting showed.

Oil prices on Tuesday jumped to a new record -- topping $100 a barrel. Consumer prices, meanwhile, rose by a bigger-than-expected 0.4 percent in January, according to new government figures released Wednesday.

And, with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank's old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent."

I don't really know what to think about all of this. So we have $100 oil prices, rising inflation, slowing economic growth, a housing market that continues to decline, and likely rising unemployment. I',m not an economist, but there was nothing I can find there that seems positive. However, the market goes up big. Maybe this is all baked in to prices already and that is the reason people are buying here. The market is a forward-looking mechanism that looks outward six or so months - I realize that. There are many people much, much, much smarter than me in the stock market and maybe they know what is really going to happen over the next few months. As for me, however, I really have no clue why we have days like today. I honestly wonder if the market is rigged sometimes and days like this help reinforce those thoughts. Today doesn't make sense to me. That being said, I have to accept it, and realize that a market that reacts to all sorts of bad news in a positive way is actually very good.

Basically, I hate this market more and more each day. Unless you are a day-trader, I don’t know how anyone can say it doesn’t just suck, regardless if you are a bull or a bear. There is absolutely no follow-through on anything, which makes trading successfully virtually impossible right now, at least for me. It feels like the “Bizarro World” from Seinfeld where everything is the exact opposite of what you are used to seeing. Whenever you see something that seems to make sense, it turns out that the exact opposite thing happens. Things make absolutely no sense right now. Today was a positive reversal after yesterday’s bearish reversal, but still no clear breakout. And it is probably getting to the point where if we do finally break above or below this triangle pattern, so many people will be watching it and trading that way, that we reverse anyway and go opposite just to mess up as many people as possible.

Sometimes I need to vent a bit(see above), but I am not blaming anyone or anything – it is only my own fault that I have been trading poorly. After thinking I was doing really well as a trader due to my strong start of the year, I have realized I still have such a long way to go. I am still up for the year but have lost many of the profits I had in the first two weeks of January. The market is very good at reminding you of your faults, and it has done that for me. I stated back in January that the period up to and after the Fed decision is likely going to chop traders up and sitting out might not be a bad idea. Well, I failed to listen to my own advice. I have also not been patient. I’ve traded with a bit of revenge, never a good idea. I have let some losses get bigger than they should have been. I have overtraded. All of the mistakes that I know I have to work have popped up over the past three or so weeks. Now I need to figure out how to get out of this little funk and get some confidence back.

Something new that I have been thinking about as well and may be a lesson being learned is that I still need to become much more of a reactionary trader rather than an anticipatory trader, especially in a market like this. I think I am so focused on catching the absolute top of a stock or the absolute beginning of a big move lower that I am making poor decisions. Because I am overall bearish right now, I am reacting to every little I see a stock do, afraid I am missing the start of a big down move. Perhaps my inexperience in bear markets is showing up as I am expecting another huge drop like we had at the beginning of the year, when making lots of money on the short side was not difficult at all. I keep seeing a move like that happening, and it may never happen. If it does, I am sure there will be time to hop aboard.

Good luck tomorrow. The only breakouts I saw today, besides AXYS, were once again the commodity related stocks, which are very extended and due for a big pullback. These stocks have been holding the market up a bit for the past few days, and if they fall, then the market could fall back too. So I really have no clue as to what to expect. I would not be surprised at a breakout attempt of the triangle that ends up failing and reversing. Daily reversals seem to be the only trend we have right now, and since we had a bullish reversal today, we should have a bearish reversal tomorrow, right?. It might be a good time to sit and do nothing for a while. Be careful out there.

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