Pockets Of Large Buying

• November 27, 2001
• Dave Floyd

The first day back after the holiday was a continuation of recent sessions. The price action continues to be muted and itchy fingers is simply a
terrible condition to have in this market. As I have been mentioning, there is a great deal of sector rotation occurring
intraday, forcing
scalpers to always be on the move. Get to know one to two stocks in a few sectors intimately, in terms of how they trade
intraday, so that you can navigate in and out with relative ease. If you are still compelled to stick with one or two stocks, be incredibly selective on your trades. 

We had a long discussion after the close yesterday, to try to gain some perspective on what is happening currently. Many of the traditional approaches we normally take are working with less frequency. The main reason, as far as I can tell, is that many stocks are not trading in tandem with the S&P or
Nasdaq futures as they have done for many years. I do not know the reasons for this, nor do I think it would offer any real insight. What I am noticing is that the stocks are trading based more on their technical condition at that point in time, regardless of what the futures are doing. 

For myself and most of the traders in my office, it is very difficult to simply ignore what the futures are doing when you have learned to rely on them unconditionally for so long. The markets always force you to adapt, it appears as though that is what the market is telling us currently.
While I do not expect this condition to last indefinitely, it appears as though it is here for now. 

So what do you do? First of all, don’t completely ignore the futures. A move of any magnitude will always drag the larger issues in that direction simply due to the whole concept of Fair Value, Parity and Arbitrage. What I believe is happening currently is that the futures are dictating price action with no other buying / selling pressure arising
from the equity side. As a result you get pockets of large buying and selling at indiscriminate times as arbitragers lock in profits buy selling stock against futures or vice versa. Seasoned traders will recognize the complete absence of large institutional players in equities, thereby making it more of a one on one against the specialist or market maker. 

Until things change, consider the following:

1. Plan on doing most of your trades in the first 45 minutes when liquidity and price action are most conducive. Mid-morning trading, as usual, is a complete waste of time, from a “scalping” stand point.

2. Pay attention to the sectors. Momentum players, and as a result institutions, are moving money around very quickly. These situations offer liquidity, a sorely needed bi-product in this market.

3. If possible, put a bit less emphasis on the futures and rely more on chart patterns on your stocks to determine entry points. Again, this is difficult given that most of us have been conditioned to take our cue from the futures.

The emails I am receiving recently are certainly beginning to show a high degree of frustration. For most of us, it is the first time we have been put to the test in our trading careers. Sadly, many traders will fall by the wayside unless they adjust. The adjustment of course is not a silver bullet, but rather a way to survive and pull in some money until the market loosens up again. Remember, what does not kill you will only make you stronger.

At the risk of sounding opinionated, I wanted to share a quote from Barron’s dated
March 24, 1930. The italics are taken from Bill Fleckenstein:

“It is apparent that the public preference for stocks is not only as marked as ever but also the will to speculate is still the speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock market enthusiasm for long.” 

“This, ladies and gentlemen, was taken from a Barron’s Trader column dated March 24, 1930. In that year, the high of the rally took place on April 17. I have used this quote in the past, most recently during my speech at the Grant’s conference last spring. That ought to strip the glow from people when they realize that behind a euphoric market rally, disaster can loom not too far in the
future.”

Key Technical
Numbers

As always, feel free to send me your comments or questions. See you in TradersWire.

Dave