The Day that Was - September 4th 2007

The first thing I want to address tonight is the fallacy that exists with the notion that the lack of trading volume in the markets is a result of investors, smart money, hedge funds, etc. being on vacation. So many times we hear in the media the volume is low due to so many people being on summer holidays. Twenty years ago this would be true, but today everyone who has a substantial stake in the markets is only a wireless laptop or a cell phone call away from making a trade. Historically speaking it is true that volume is light during the summer months but when there is trouble in the markets it does not matter if it is the summer trading season or not. Especially in our technological age where anyone can make a trade from just about anywhere in the world with a wireless something.


Ok, I needed to get this volume issue on the table. For so long during this market bounce we kept hearing from some talking heads that the volume is weak because everybody is on summer break or something along those lines. Take a look at the DOW chart shown here and observe the volume levels I highlighted. Those that control large amounts of money had no problems selling their shares when the markets were heading down, and that was during a summer month. Do you think that those who make a living of controlling vast amounts of money simply sold in early to mid August and then just said "ok, pack the kids, were going to the beach"? Of course not, when there is danger or even the hint of a super money making opportunity they do not just go away for a holiday and let the markets sort themselves out. For they are the ones that make the markets move. Again, look at the DOW chart, notice the large volume while the selling was taking place, now that the market is attempting a bounce the volume has not shown any substantial strength, even today when supposedly everyone would be back to work and the volume would increase substantially it did not.


There is a reason why the volume was high on the way down and is still low on the way up. It is because the large money movers are not jumping in yet. There are no "cannon ball" flips off of the diving boards by the smart money into the markets here yet. They are seeing the same signs of a market and an economy that looks too questionable to just jump in. The market had a rally today on weak volume still and it stalled at an important resistance level that I provided you during the afternoon update on the S&P 500 chart. The market is trading on low volume and on expectations that the FOMC is going to cut the Fed Funds rate on September 18th. This is called "priced in" and is a term you as a trader will hear many times. If you are new to the markets what it means is that the market is acting as if something has already happened when it actually has not happened yet. They are trading as if the the FOMC will cut the rate and that there are no doubts about it. This is a dangerous environment for a market to be trading in for if the market starts to question if they will or won't cut the rates again then those that priced in the cut in their actions now start backing it out. And the market falls.


Trading on a perceived or believed action which has yet to take place leads to high risk trading. It is essentially placing a bet. Smart traders don't place bets on a hope, we place a trade on a good reward/risk profile. That is what separates us from those who are trading on emotions and the fear of "missing out on the big move". There are very strict rules to making money consistently in the markets. One of them is to never trade on 'hope', for if you do you have already lost. Looking around on some of the message boards (and yes, I confess I did peek at the yahoo boards to see what the mind set is) you can see that there is a lot of retail money running on emotional highs right now. Too many statements around the internet chat rooms and trading forums like "get in now", "buy now or you will regret it", and on and on and on. This is what I call the "dumb money" sentiment indicator. When the dumb money sentiment indicator is peaking it usually signals that the emotions are in control and not logic.


Logic is looking at the charts and seeing that the vast amounts of volume that sold on the way down is still not in there on this bounce. If it were indeed the bottom (August 16th) as the some would say it was then one would expect to see even higher amounts of volume during the recovery side. The problems that got the markets in this situation are still there, the only thing that has changed is the amount of people 'betting' that the FOMC is going to cut the Fed Funds rate. Late in the day today the President of the Richmond Federal reserve made statements which would take some of the air out of the idea that the FOMC will cut rates on September 18th. Although he is not a voting member of the FOMC committee his statements still sounded an alarm and we saw the market pull back some into the close today.


So as nothing has materially changed in the markets concerning the state of the economy and/or the health of the financial system (remember sub prime? Remember the notes being traded between mortgage institutions which can't be valued? Nothing has been solved yet) the only thing which is different today is the 'hope' that everything will be OK is higher, not the proof.


Rebeltraders don't trade on hope and perceived events which have not happened yet. We trade on fact and logic. Anyone that entered into a swing trade (long) today has placed themselves at a high risk of losing money. Some people get lucky trading in the markets and then think they know it all and that their system must be working. Then when luck runs out they get mad at the system and think the markets are out to get them. Unless you learn to trade like a machine (void of emotion) then you will lose.


Your money should be very important to you... don't throw it into a trade on a hope and a prayer... Lisa and I go through charts, we keep our ears open and we listen to what key people are saying, we watch the action in the markets (reading the tape), we surround ourselves with objective opinions and sources of information in order to arrive at our collective decision. If we wanted you to be in the market trading today we would have said so this morning.


Reward MUST outweigh the risk before we will tell you to put your money on a trade. We won't do it with our own money and we won't tell you to do it with yours either.