Who is the Market?

WHO IS THE MARKET?

Let me begin by clarifying that whenever I am referring to we, the market as an entity, traders, investors or the street I'm referring to you, me, the professional traders on the trading desks, institutional investors and anyone else who invest in the financial markets. We are the market. The stock market is a collective entity comprised of our collective emotions.

While interest rates and corporate earnings determine stock prices, the market controls how those variables will be perceived and applied as price action as stocks fluctuate in accordance with investor’s emotions and perceptions that ultimately define "market" sentiment.

Always keep in mind when investing how society's mood toward the economy and the perception concerning the outlook of the country's future determine the market's view toward accepting risks. Investing in financial markets is a balancing act of capturing the disconnect in price between the market's perceptions and the realities of the social and economic conditions that exists.

Often, I will emphasize the current stock market price action is being controlled by a lack of any real news or market moving data. I will refer to this as a "news vacuum", as it is currently creating the perception among traders and investors that market participants are uncertain as to the future course of action to take. Always keep in mind, more than anything else; the market abhors any type of uncertainty just as nature abhors a vacuum. A market vacuum engenders chaos.

Traders cannot position their portfolios into an atmosphere of uncertainty. They have only two options: go to cash by "flattening out" their "sheets" or by going to a neutral or a somewhat short position against a naturally long bias against the overall market. As a result of this uncertainty, the market can swing in 100 -200 - 300 point extremes by groups of investors uncommitted to their positions and the future direction of the market. As we have seen with the options action in the volatility index, the VIX, uncertainty creates volatility. This is the type of Discipline all investors, including you and I, must develop. We must always remember that cash is a viable asset alternative and in my “investment style”, cutting back to long-term core holding positions is the equivalent of cash.

That’s why we must always keep in mind that market perceptions are more important than market realities. Charts are simply looking through the market’s rear window and illustrating what the fundamentals have established. Helpful at times, but seldom determinative. It is the perception of what the market will do or what the market fundamentals may show that is often more important for investors than what the fundamentals actually show and what may ultimately occur longer-term in the markets. The markets are all about perception.

That’s why you will often hear me refer to upcoming market events as “The Big Bad Number” or the “Data Du Jour” and traders as the “Consensus Counters” or the “Herd”. We have to know what “they” are thinking and doing now in order to know how we must position ourselves in-line with perception and in advance of what may ultimately move the market or a stock longer-term.

For example, Federal Reserve FOMC meetings (along with employment data, the CPI and PPI inflation data, retail sales and consumer sentiment) currently create a great deal of apprehension and anticipation on the part of traders and long -term investors. As with each critical fundamental data point, prior to each FOMC meeting there are those who have concluded the Fed decided not to cut the Fed funds or discount rate. Then the market is swung in the opposite direction by another group of investors who believe the Fed has decided to cut the Fed funds rate and will choose growth over fighting inflation to avoid a recession. This type of uncertainty creates the market swings, uncertainty and lack of commitment on the part of overall market participants attempting to anticipate the “consensus”.

While no one expects Chairman Bernanke to announce any major revelations regarding the Federal Reserves intentions in any speeches, that will not preclude the markets from formulating their own opinions and creating their own perceptions based upon his remarks. Often, these changing opinions and perceptions within the marketplace create "dislocations" in various sectors and specific stocks.

By "dislocations" I'm referring to the price difference between the market's current valuation of stocks or sectors and their actual intrinsic value when measured by any reasonable metric. In other words, the stock market and certain, if not all, stocks can become mispriced and undervalued as a result of perceptions creating the opportunity to establish or add to positions at very favorable prices.

Historically, such disconnects or price dislocations have proven to be one of the most advantageous opportunities an investor has to purchase stocks.

A good indicator of stock market price dislocations is often referred to by traders as "tension on the tape." What they are actually referring to is a type of volatility that moves the market in rapid intraday extremes or very tight trading ranges. As we have seen recently, the market can open up or down 50-100 points or more on the Dow and then seemingly reverse instantly to the same extent.

In the same manner, the Industrials can move in a very tight range on either side of unchanged for a prolonged period. Both types of action indicate confusion and lack of commitment on the part of the traders. Therefore, the "tension on the tape" can be your heads up to look for price disconnects that create excellent buying opportunities.

During the trading session I attempt to convey to you what I'm seeing in the market place and hearing from the trading desks and on the floor via my Yachtsman Trading Desks Updates. While time is always of the essence during the trading day and sentiment and events can change instantly, hopefully these expanded Updates will help to better explain my thoughts and observations of what I am hearing "through the grapevine" and what may be influencing the market action.

If you would like to receive these email Trading Desks Updates during the trading day or would like send a question or let me know what you think of this approach please write me with any thoughts or questions you may have at YachtRetirement@aol.com . I may not be able to respond to each question or observation during the trading day but I will attempt to work my responses into my posts or future articles.