Trader’s Narrative

The picture to the left was the last thing the paralyzed bears on Wall Street saw this afternoon. Ouch!

A half tonne bull smacking you full frontal will tend to do that. And this, after having endured a snoozefest all week. Wow! what a day. Well, we finally got the market’s reaction to the Fed announcement. And after the ridiculous rumours of 50 bp increases, the tape liked the expected 25 bp increase.

Here’s a shot of the intraday action:

It’s not hard find the exact point at which everything went batshit crazy. Just look at the volume explode! Days like this are always nerve wracking because of all the head fakes. But today was textbook simple. If you squint really hard you can find the first ‘dummy’ spot to go long (first green circle). And if you missed that, there was the second one not long after (second green circle).

Taking a look at the breadth, we can see things can hardly look more lopsided:

Today was probably a 90/90 day (as per Lowry’s) or atleast very close, which means we now have both multiple 90/90 down days and 90/90 updays.

Still, Lowry’s analysts are second guessing their own research. I think this is because they see that while the indices are in fair shape, the individual constituents are not. Bernie Schaeffer has an interesting take on this (see article).

The advance after the rate announcement is understandable since removing doubt always helps the market, but the gap up in the morning was puzzling. I think it threw off a lot of people who automatically wanted to fade it and unwittingly provided extra kindling for the afternoon bonfire. Perhaps it was the usual end of month/quarter window dressing. But then why was Asia so strong overnight? Maybe it became clear to some smart, big traders that it was a shoe in for 25 bp (can’t believe not everyone believed this).

A lot of traders though, decide to sit out days like today. I used to agree with that tactic but now I’m not so sure. Consider the great traders. They don’t avoid such days. In fact, they thrive on them. Some even make their whole year on days like this.

Maybe I’m thinking this way because last night I was reading Marty Schwartz’s “Pit Bull” for the nth time and happened to read the section where Marty describes trading the volatile markets during the first Persian Gulf war. If you haven’t read this great trading book, do yourself a favour and get it right away. Marty is probably the greatest short term trader ever.

Here’s a jaw dropping chart that shows the swiftness with which the Bank of Japan removed liquidity from the world’s financial markets:

Source: GaveKal, via Mauldin.

The only consolation I can find in this chart is that every time the year over year change crossed the zero line to the upside, it was a great time to buy. So now the question is, when will the Bank of Japan start to once again increase their monetary base? Or will that matter since the carry trade has been laid to rest with the cancelation of the weak Yen policy?

Things are especially muddy because Fukui is embroiled in a scandal (related to a personal investment). If because of this the government of Japan gets more say in setting policy, all bets are off.