There is obviously more going on right now than just price. There is overt manipulation going on, in the form of altering how earnings are calculated (FASB) and how the markets operate day to day (the Quant Model Short Squeeze, vanishing Liquidity and the SPY squeeze today). And prices are responding by moving higher in a historically rapid fashion.
But you can’t build a strong house on weak foundation. I have chronicled how much of the gains of this rally have been news-related and done while the markets are closed. That just means there is no support for prices when things roll over again – and you know they will.
Look at the Dow (DIA). There was a nice rally off the lows (Green Lines), but since, as the rally has lost steam, there have three consolidations (blue lines) followed by huge overnight price moves (Gap Up Opens). This has made it really hard to manage money, because you want to buy when Big Money forces prices up through obvious resistance.
The purpose is to make Big Money commit enough Capital to overwhelm any selling. But when you ramp prices when the markets are closed, then there is no selling to have to battle and now all the guys who were short are getting stopped in as price jumps above their stop loss points. It is classic manipulation. It has hurt me as I have been stopped in at not so good prices on several positions.
The other game now is to just ramp prices up hard in the last hour. It starts at 12:04 PDT almost every day.
The byproduct to all of this is enormous price volatility. The Oil Service Index (OIH) has had an -8.9% selloff and a +11.2% rally in this week’s three days of trading. I owned it in both directions and sold it today. Wells Fargo was down -23.2% and then up 27.4% in the last 3 days. I sold it today, too.
I don’t really know what to do going forward. This new level of volatility is changing the dynamics of how to invest. +27% in 24 hours is not normal. That’s 3 years’ worth of return. I see the Dow move half a percent in two minutes, each time somebody hits the Futures’ buy button. Half a percent in 2 minutes? How are you supposed to manage that risk? How are you supposed to invest in the Dow when it rallies 6.7% in an hour of trading and then a few days later is down 4% in hour?
The markets have changed. They are not about generating capital for companies to invest and people to own. They are about driving asset prices higher to further policy agendas. The Government has totally fowled things up. And thus individuals are now forced to deal the unintended consequence (price volatility).
The markets now trade like a Third World Banana Republic. I used to watch the shares of Chinese Stocks and Latin American Stocks with fascination as they would gap up 5% one day and then gap down 5% a few days later, and wondered how anybody could own those and sleep at night, knowing that they could walk in the next day and be down big and have no capability to manage their risk via Stop Losses.
Our market has become the same animal. Look at this Chinese Oil Company (CEO). Look at all the gap moves (Green Circles). It looks like the Dow. What are you supposed to do with this thing?
I started buying individual companies as this rally matured, because they offered better risk-reward entries than the ETFs did. But the volatility they have experienced has been ridiculous. MasterCard (MA) was down $14 and then up $14 in like 24 hours! I sold it. I can’t handle that level of volatility.
My goal now is to stick almost completely with ETFs. I wanted to buy a lot of Sector-Specific ETFs, but am concerned about their volatility. That may force me into more Broad Market ETFs than I originally planned. My goal is to manage risk (price volatility) while still trying to make money. It has been quite a challenge.
In some ways I am too hard on myself. Here is my Bull Market- Bear Market Chart. As you can see, the rally is a blip. The market has crashed, moving averages are still way above price and it will take time to repair all the damage of the 2008 Crash. That is the forest. My accounts are pretty much flat with where they were at the end of 2007 – and I’m still beating myself up. That’s nuts… 90% of the investing world would give their right arm for that performance.
I want to see a pullback that I can buy and manage my risk. I think that once we get the pullback, Big Money will be forced to buy, for fear of missing any confirmed breakout above this rally’s ultimate high. The commitment of Capital from Big Money should go a long way towards smoothing out the daily price volatility by bringing real liquidity back into the markets.
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