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Feeling the Heat


Never let them see you sweat


Bath-water may be murky brown,
Just pull the plug and it'll all go down.

(Reverend Horton Heat, "Bath-Water Blues")

What happened to Spring? Don't we have at least two weeks of Spring left? Walk a few blocks to work in the early morning and already you feel like taking a bath. Yes, here in the 'Ville it's 80 degrees already and it's not even 8 a.m., but I'm not complaining about the heat; at least it's humid.

What does the amount of water vapor in the air, or humidity, have to do with financial markets? Quite a bit, actually. I think of humidity as the unseen market forces layered over, around, and through the instruments we trade. I think of humidity as the density of the competing thought processes battling in the markets at any given time. It's not so much important 'what' the market humidity is, as it is developing ways to evaluate the market's absolute and relative humidity; the terminology is already in place, we often talk about an index being sticky, trading dry, or heavy.

In weather terms there are two important 'types' of humidity. Absolute humidity, simply the mass of water vapor in a given volume of air; and relative humidity, the amount of water vapor actually in the air, divided by the amount of water vapor the air can hold.

Of course, weather forecasters have the luxury of being able to accurately measure absolute and relative humidity. We're not so lucky. In financial markets, science is often obscured, or completely disregarded, in favor of purely descriptive methodologies. It's the equivalent of turning on the Weather Channel and watching the forecaster say, "Today we expect it to be hot, while this evening it will be less hot, and tomorrow it will be somewhere between hot and not so hot, although it could be even hotter... depending."

Wait a minute, bro, aren't you a technician? Aren't charts purely descriptive? Sure, they can be, but so too can things we think of as financial "science." I'm not a pure technician in the sense that the charts I watch define how I make decisions. They are simply an arrow in the quiver. After all, the point & figure charts I use are not predictors. They are simply tools for describing supply and demand at a given point in time. They help me evaluate where we are, the specific location from which we'll soon be moving.

At the end of the day, after the Fed has spoken, after the earnings have been released, after the news has hit the wires and all been digested, it's all about supply and demand. I've always believed that understanding where we are is critical to discerning where we are going. Be wary of the many market commentators who have no idea where we are; why should we rely on them to help us navigate our financial journey?

So, it's a humid market we face - the competing views battling it out are dense, multi-layered. Liquidity - it's the market's heat, and measuring it is similar to taking the market's temperature. But like they'll be saying on every street corner here in the city, it's not the heat, it's the humidity.

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No positions in stocks mentioned.

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