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How Much Does the Market Know?


Truth be told, the market is always right, but sometimes doesn't know anything.

Well, I said come along my baby, we got chicken in the barn,
whose barn, what barn, my barn
Come along my baby, really got the bull by the horn
We ain't fakin', whole lotta shakin' goin' on.
-Whole Lotta Shakin' Goin' On (Jerry Lee Lewis)

What did the market know on Tuesday that caused the commodity complex to crater that it didn't know on Monday? Your guess is as good as mine.

What did the market know on Monday to cause equities to explode that it didn't know on Friday?

The answer? As Jack would say, "You want truth? You can't handle the truth."

We want reasons, but the cause and effect of stock behavior is tantalizingly vague.

Truth be told the market is always right, but sometimes doesn't know anything. What does the market know right now and when did it know it is the $64,000 question.

Insider trading may be illegal but I never heard of big money that didn't take a position because it didn't think it knew something the other guy didn't.

But, after all, that's why technical analysis works at turning points: there are typically tell tale signs by the big money as it distributes and accumulates.

What did the market know when it "broke out" on July 12 that it didn't know on August 16?

For one thing, if the Creature's constituency (read boyz in the investment banking band), didn't know about the slash in the discount rate prior to the open on August 17, then I've got some swampland in Florida with flotation condos for ya cheap. Who knew the market would drift all the way up to the highs at the time, all the way into the the window of redemption?

Call me a cynic, but methinks you don't turn the U.S. Equity Supertanker on a dime unless the engine room is chock full of agenda.

As one hedgie-trading bro exclaimed to me midday Tuesday, "I just can't figure this thing out!"

Since when could we ever figure it out? That's the problem, thinking too much. Who was at the door handing out invitations that the market was rational, the the market as supposed to make sense?

As traders all we've got are set-ups. Set-ups are just set-ups and nothing more, nothing less. An edge, not a guarantee.

Speculation is observation, pure and experiential. Thinking isn't necessary and often just gets in the way. The trick is to believe what one sees.

So what did Gold see on Tuesday that shook it up, sending the metal down $20? Is the short dollar trade overcrowded? Will The ECB follow suit and lower rates this week? If all fiat paper is devalued will the dollar be graded on a curve?

What did the market know about the commodity complex shakedown that it didn't know on Monday?

Probably the same thing it knew when stocks ripped off Boo's face on Monday, which it didn't know on Friday. Nothing. It thinks it knows a lot.

In fact, much of the behavior may be the low spark of high-heeled boyz getting paid to pretend they know a lot about running other people's money.

There's a whole lotta shakin' goin on whatever the cause. But if there weren't where would the Dukes get their country club dues?

As my father used to say, "Stocks don't move, they ARE moved."

It's a cottage industry financial conundrum out there. It's a medulla oblongata inagadda davida accordion where one man's momentum melt up is another man's parabola psychosis. Can't we all just get along?

You puts up your money and youse takes your chances. You have to believe what you see even though often what you see is not believable. Or, as Richie Prior said when caught in the act by his wife, "you gonna believe me or your lyin' eyes?"

It seems to me the only way to believe what we see is to keep it simple. In trading less is more.

One of the simplest but many times the most powerful of trading tools is the 50/100 rule. Stocks often move in 50% and 100% increments. Stocks seek equilibrium. Markets seem to have their own innate symmetry, for example the S&P declined precisely 50% from its March 2000 high into the October 2002 low.

Google (GOOG) has advanced 50% since it popped out of a long consolidation which ended mid September 2006 at the 400 level. This leader is up 50% in 360 degrees in time. This may be a significant square out.

Click here to enlarge.

The following charts show the symmetry and potential square outs on some other leaders.

I sense that the July/August period may be just a precursor, a shot over the bow of the USS Volatility. If I am right and the action becomes even more erratic over the next two quarters as the market battles to resolve the forces of hyper-inflation and deflation, it will be more important than ever to keep that dog thesis on a tight leash. There's gonna be a whole lotta shakin' goin on.

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Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.
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No positions in stocks mentioned.

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