Friday, June 29, 2012

How This Market Is Unique

I have to say, current is the most unusual market environment I've witnessed over almost 16 years of trading (sheesh, has it really been THIS long??). No, it's not algos or HFT that make it so unusual. None of those things ever influenced the method I deploy to read the market in any significant way. Here is what is so unique about it.

Normally market is in one of two states in relation to coming news. First, it has no idea about news coming its way. This is usually what we call "Genuine News" - earthquake would be a good example. So, the market trades in its own way, reacting on this and that, until unexpected comes and changes the picture. Second state is, market knows about news coming, evaluates it in advance and starts discounting it. This is the most frequently seen state of the market and the one on which whole trading methodologies are built. We called it Fleece Sheep News in that same article linked above.

What we have right now though is a weird hybrid of those two modes -  the market knows about news ahead but isn't able to factor it in effectively. It remains a matter of speculation and guesses for incredibly long time, and we are not much closer to resolution than we were two years ago. Those who thought the whole EU charade should collapse continue thinking so; those who believed it will print its way out of debt burden still believe it. This very unusual mode for such unusually long time causes very abnormal volatility and bi-polar market that soars like an eagle one day and digs the hole like a mad rabbit another. Even intraday, market acts like a frog in a football kicked by yet another headline. I suspect we will remain in this mode for a good while. Higher volatility goes hand in hand with shorter time frames. Investors turn into swing traders, swing traders become day trader, day traders become scalpers, scalpers... well, they remain scalpers I guess.

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