Tuesday, March 23, 2010

If You Don't Believe Technicals Have Come to Dominate Fundamentals... Today is a Case Study

While I do believe most investors should have both tools in their tool belt - both fundamental and technical analysis - I've opined many times the market character has changed.  Technicals have come to dominate, and Benjamin Graham is stuffed in a closed somewhere.  For those who watch things day by day, year by year, the nature of the market is very different then even 5 years ago.  If you don't believe in the hocus pocus, black magic of technical analysis I can not only point you to a few years worth of posts, but today alone is a great example.  We cited 1170 on the S&P 500 as an important level... I'm not genius here, everyone on Wall Street, human or silicon, also knew that was an important level.  We butted against this level 5 days in a row (intraday).  Just as we did 1150 the previous week(s).

Today it finally broke and we (almost) immediately went vertical - here is the intraday chart.

[click to enlarge]

Now at some point, as used to happen, the obvious trade fails.  I don't know when that point will be, but that's not the point of the exercise.  So much of the trading nowadays is concentrated in a few huge institutional hands - prop trading, quant trading, robot trading, all copying each other and it self reinforces.  [Feb 12, 2010: (Video) Scott Patterson Tells Us the History of HAL9000 in "The Quants"]  (of course it self reinforces to the downside as well which we began learning in August 2007 and through February 2009)  I've repeated over and over that this, along with the dominance of ETF trading has changed the face of the markets - many times individual stocks; especially of the larger kind; are simply dragged along with their indexes.  Their individual stories, fundamental stories, or characteristics are now secondary to what ETF they are in, and if that is HAL9000's choice of the day, week, or month.

I will repeat to newbies to technical trading the example I like to use.  If you saw a pattern where sweater sales in Miami shot up double whenever the temperature went over 90 degrees, you'd be incredulous.  You'd laugh.  You'd scoff.  But if this happened over and over and over... and you were a sweater salesperson, trust me - you'd load up on sweaters once it hit 90 degrees.  Like it or hate it - it is "the market", so to ignore it... well it's at your own peril in my opinion.  That in my mind is technical analysis at its basis...... patterns.  And the more people who follow the same pattern (and program computers to do so) the more it self reinforces.  Which is perhaps why these moves fail so much less than in the past. 

Unless it's partly the helping hand of Larry Summers, who spent some time learning how the markets work on the inside at hedge fund DE Shaw.  [Apr 6, 2009: Larry Summers - No Conflict of Interest; He Pinkie Swears] Because if you know how the quants work, and you really wanted to lead the market to an ever higher place, you could be one powerful man - almost a Pied Piper of sorts; blowing your flute at the most opportune time so the lemmings - silicon or human - follow.  Confidant enough in fact, to get your President to say "it's time to buy stocks" the same week the market put in a low in March 2009, and then went on an epic rally - low volume in nature, much of it in premarket of course.  But that's a theory for those who live on grassy knolls of course... ;)  I'll have none of that thesis! [Mar 18, 2010: (Video) Scott Bleier - Behold the Zombie Market]


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