Why The Market Is About The Players In The Game And “The Trade”

Daily State of the Markets 
Wednesday – May 18, 2011

I have a confession to make. While I spend an inordinate amount of time in front of a computer and three of my six screens are, at all times, filled with charts and blinking numbers, I’m really not a pure market technician. Yes, it is true that I would never even consider making a buying or selling decision without first checking a chart. But frankly, I like to keep it simple. And as such, the pure chartists out there may scoff at my methods as being relatively unsophisticated. (I admit to liking the old-school stuff such as trendlines, moving averages, support-resistance zones, volume relationships – you know; the stuff that doesn’t require a supercomputer to calculate.)

Yet at the same time, please don’t even consider accusing me of being a fundamentally-based investor. The problem here is that contrary to some of the academic research that once populated the waiting rooms of so many financial planning firms (most of which has been proved almost completely wrong over the past 12 years), the market is not efficient and the fundamentals of a company, country, or market don’t always win out, or even matter!

Truth be told, I consider myself a “market environmentalist.” My goal is to identify, understand, and attempt to profit from any and all market environments. The primary reason I don’t focus on just one indicator or even just one method of investing is that the market’s environment is constantly changing.

In my humble opinion, sometimes the market is all about economic data (this usually occurs when the economy is either entering or exiting a recession). Then there are times when the game is driven by earnings (usually during the “boom” part of the cycle). Sometimes, it’s about the news, geopolitical issues, the Fed, or even the actions of governments thousands of miles away. And yes, there are even times when it is indeed all about the charts. As such, the real trick to this game is to be able to adapt to each and every changing environment.

Then there are times such as these, when the market is about the players in the game and “the trade.” As I’ve stated a time or 20 over the past couple of weeks, this market is about the relationship of various assets to the dollar. It has become blatantly obvious that anything that affects the dollar is going to, in turn, affect stocks – usually on a tick-for-tick basis lately.

Thus, my question this morning is akin to the age old dilemma relating to whether or not a tree falling in the woods actually makes any sound if no one is there to hear it. More specifically, if a breakdown on the charts (a break of a trendline, moving average, or support zone) occurs due to trading driven by algorithms being executed by a machine in response to six or seven other factors that have little to do with anything except the ability to make a buck on a 30-second trade, should it count?

Without hesitation, the pure technicians out there will say, “Yes, of course – a breakdown is a breakdown – the reason why doesn’t matter.” And, in short, this is the reason they won’t let me in the chartist’s club – I like to know WHY things occur the way they do on the charts.

So, with the computers churning out a sea of trades every day based on the latest updates out of Europe (Tuesday’s rebound was sponsored by word that any “reprofiling” of Greek debt would likely involve extending the duration of the bonds as opposed to imposing haircuts on the bondholders) I am beginning to question the importance of things like support and resistance zones, moving averages, and trendlines. I know this is blasphemy to the technicians. But to be fair to both sides, I also question the wisdom of the idea that the current pullback in stocks is a sign that market players are concerned about the economy (or Greece, China, etc.). But such is the game until this particular environment changes.

At this time then it is probably best to either (a) take a stance on the future direction of the dollar and place your bet or (b) wait for the environment to change. In both cases, it is also worth noting that the game isn’t exactly easy right now.

Turning to this morning… Despite markets moving higher overseas, the lack of economic inputs may be leaving traders looking for direction in the early going here in the U.S.

On the Economic front… There is no important economic data scheduled for release today.

Thought for the day… Learn to trust in an idea whose time has come…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets: Australia: +0.26% Shanghai: +0.70% Hong Kong: +0.48% Japan: +0.99% France: +0.53% Germany: +0.16% London: +0.49%
  • Australia: +0.26%
  • Shanghai: +0.70%
  • Hong Kong: +0.48%
  • Japan: +0.99%
  • France: +0.53%
  • Germany: +0.16%
  • London: +0.49%
  • Crude Oil Futures: +$1.15 to $98.06
  • Gold: +$11.40 to $1491.40
  • Dollar: higher against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 3.103%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -0.83 Dow Jones Industrial Average: -6 NASDAQ Composite: -6.96
  • S&P 500: -0.83
  • Dow Jones Industrial Average: -6
  • NASDAQ Composite: -6.96

Wall Street Research Summary


  • Deutsche Telekom (DT) – BofA/Merrill
  • Research In Motion (RIMM) – Bernstein
  • Cedar Shopping (CDR) – BMO Capital
  • Under Armour (UA) – Citi
  • Telefonos de Mexico (TMX) – HSBC
  • Goldcorp (GG) – HSBC
  • Dick’s Sporting Goods (DKS) – Susquehanna
  • Canacian Natural Resources (CNQ) – TD Newcrest
  • KB Home (KBH) – UBS


  • Hewlett-Packard (HPQ) – JPMorgan
  • Kilroy Realty (KRC) – RBC Capital
  • Dick’s Sporting Goods (DKS) – Sterne, Agee

Long positions in stocks mentioned: none

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