Friday, September 16, 2011

Moving Up, But With Negativity

It is always puzzling when the market runs the way it has the past few days, when no one really seems to believe in it. Even folks who tend to be perma-bulls are advising caution. Who can blame them when using the news as an excuse to buy is so flimsy?

To understand the market beast, you have to appreciate how perverse it can be at times, especially when there is a widely held consensus. The more monolithic the thinking, the more likely the market will do the opposite. When everyone agrees, the more likely it is they have already acted on that belief, and the easier it is for the market to move in the opposite direction.

That sort of contrary action is challenging enough, but when you add high-frequency trading to the mix, it really gets tricky. There are many different styles of computerized trading, but one of the most obvious is the one that juices momentum. It walks stocks straight up and extracts pennies along the way. It is like a Ponzi scheme, and as long as the trend continues, everyone is happy. But the moment the machines pause, the pattern breaks down quickly.

There are plenty of good reasons why the market should falter. There is substantial overhead resistance, somewhat extended short-term conditions and problematic news flow. On the other hand, there are a lot of frustrated bulls who want to buy a dip and will probably give the market some support.