Trading

October was the worst month for the S&P 500 since October 1987.  The current bear market, which made its most recent low this past Monday,
is now the fourth longest decline in the S&P 500 without a 20%
rally (on a closing basis). Besides the 1973/1974 bear market, the only
other times this has occurred was during the 1929-era Depression.

But that doesn't tell the whole story. It was a month that witnessed the second worst week ever, as well as one of the best.  It had two days where the S&P 500 was up more than 10%; along with one of the market's worst ten days ever too.  To sum it all up, "Volatility" was the word of the month.

In terms of daily moves, the S&P 500 had only three trading days in October where the one-day change was less than 1%. Looking back over the last 50 trading days, the average daily change in the S&P 500 has been a move of 3%.   Unfortunately for the bulls, most of those moves were down. Historically, the only period where the average daily move in the S&P 500 has been higher was during the Depression.

The volatility affected traders significantly.  If you summed the intra-day zig-zags, the daily range has been much higher. This put many trading models into unseen territory.

Barry Ritholtz put together a list showing just how bad October was.  I enjoyed it, and think it is worth the click; here is a link to that post on the Big Picture.

It has been another strong week for fear, greed and volatility.  Earnings season is here, and we are seeing large moves in both directions.

There continues to be unprecedented global cooperation in the wake of the financial crisis.  The world seems to understand that it has to "snooze" the alarms until after the US election. The French have asked for a series of global summits to deal with the global financial crisis, with the first to begin after the U.S. election — and the last and most important to be held after inauguration day.

Stratfor claims that this shows two things. The first is how flexible many international crises are. They can wait for changes in political leadership. The second is how important the United States remains. If the United States had lost its leadership role, French President Nicolas Sarkozy would not have gone to Washington to get the Americans to agree to a summit. The rest of the world could proceed by itself. Most likely, that isn’t going to happen. The Europeans and Asians meeting by themselves would not be in a position to make any decisions. For that, the Americans need to be there. And since the Americans won’t have a new leader until February, the world financial crisis will just have to wait until then. My point?  It would be prudent to expect fear, greed and volatility to continue.

Looking at this daily chart of markets for the past few weeks, I'm struck by this seeming randomness. It almost looks like there's no pattern.

It is as if Jackson Pollock threw paint on our trading monitor and we mistook it for a chart. This utter lack of pattern might be an incredibly clear statement by the market. It says: "Danger, there is no edge here."

The strange thing about markets, though, is that what doesn't make sense from one perspective – may make a lot of sense from another.  For example, here is a daily chart of the same S&P 500 Index, only showing a much longer window of time.

Hopefully that long-term support line (just below 800) holds.

It has been another strong week for fear, greed and volatility.  Earnings season is here, and we are seeing large moves in both directions.

There continues to be unprecedented global cooperation in the wake of the financial crisis.  The world seems to understand that it has to "snooze" the alarms until after the US election. The French have asked for a series of global summits to deal with the global financial crisis, with the first to begin after the U.S. election — and the last and most important to be held after inauguration day.

Stratfor claims that this shows two things. The first is how flexible many international crises are. They can wait for changes in political leadership. The second is how important the United States remains. If the United States had lost its leadership role, French President Nicolas Sarkozy would not have gone to Washington to get the Americans to agree to a summit. The rest of the world could proceed by itself. Most likely, that isn’t going to happen. The Europeans and Asians meeting by themselves would not be in a position to make any decisions. For that, the Americans need to be there. And since the Americans won’t have a new leader until February, the world financial crisis will just have to wait until then. My point?  It would be prudent to expect fear, greed and volatility to continue.

Looking at this daily chart of markets for the past few weeks, I'm struck by this seeming randomness. It almost looks like there's no pattern.

It is as if Jackson Pollock threw paint on our trading monitor and we mistook it for a chart. This utter lack of pattern might be an incredibly clear statement by the market. It says: "Danger, there is no edge here."

The strange thing about markets, though, is that what doesn't make sense from one perspective – may make a lot of sense from another.  For example, here is a daily chart of the same S&P 500 Index, only showing a much longer window of time.

Hopefully that long-term support line (just below 800) holds.

The markets gained some ground this week, at least from a point perspective. It's so tempting to want to believe that the worst is over because of some of the rallies we've seen since late last week.

It is possible that last week marked a major bottom. However the market is certainly not trading normally. So I'm not convinced.  The volatility we're seeing is unprecedented.

Just this past week we had days with 10% – 15% swings inside the day. In fact, over the past 10 days the Dow had intraday swings of almost 85% of its total point value. We also saw the largest single day loss in the
S&P ever (9%) as well as one of the biggest gaining days ever. My point is simple, fear and greed are still operating in extreme levels.

Stress Metaphor and the Markets:

A lecturer, when explaining stress management to an audience, raised a glass of water and asked 'How heavy is this glass of water?' Answers called out ranged from 8 to 20 ounces. The lecturer replied, 'The absolute weight doesn't matter. It depends on how long you try to hold it.

'If I hold it for a minute, that's not a problem.
'If I hold it for an hour, I'll have an ache in my right arm.
'If I hold it for a day, you'll have to call an ambulance.

'In each case, it's the same weight; but the longer I hold it, the heavier it becomes.'

He continued, 'And that's the way it is with stress management. If we carry our burdens all the time, sooner or later, as the burden becomes increasingly heavy, we won't be able to carry on.'

'As with the glass of water, you have to put it down for a while and rest before holding it again. When we're refreshed, we can carry on with the burden.

How does this apply to the stress and the volatility hanging over the heads of market participants? The potential recovery is in a fragile state simply because people are stressed and tired; and I don't think it won't take much to trigger another bout of fear and greed.

The markets gained some ground this week, at least from a point perspective. It's so tempting to want to believe that the worst is over because of some of the rallies we've seen since late last week.

It is possible that last week marked a major bottom. However the market is certainly not trading normally. So I'm not convinced.  The volatility we're seeing is unprecedented.

Just this past week we had days with 10% – 15% swings inside the day. In fact, over the past 10 days the Dow had intraday swings of almost 85% of its total point value. We also saw the largest single day loss in the
S&P ever (9%) as well as one of the biggest gaining days ever. My point is simple, fear and greed are still operating in extreme levels.

Stress Metaphor and the Markets:

A lecturer, when explaining stress management to an audience, raised a glass of water and asked 'How heavy is this glass of water?' Answers called out ranged from 8 to 20 ounces. The lecturer replied, 'The absolute weight doesn't matter. It depends on how long you try to hold it.

'If I hold it for a minute, that's not a problem.
'If I hold it for an hour, I'll have an ache in my right arm.
'If I hold it for a day, you'll have to call an ambulance.

'In each case, it's the same weight; but the longer I hold it, the heavier it becomes.'

He continued, 'And that's the way it is with stress management. If we carry our burdens all the time, sooner or later, as the burden becomes increasingly heavy, we won't be able to carry on.'

'As with the glass of water, you have to put it down for a while and rest before holding it again. When we're refreshed, we can carry on with the burden.

How does this apply to the stress and the volatility hanging over the heads of market participants? The potential recovery is in a fragile state simply because people are stressed and tired; and I don't think it won't take much to trigger another bout of fear and greed.

Have you noticed how correlated and coordinated actions have
been worldwide throughout this crisis? The concept of economic allies
presupposes that we also have economic enemies. It's easy to construct
a theory that countries like Russia and China are using financial
markets to exert leverage in a nascent form of economic warfare.

It is
also easy to construct a theory that says that we are the enemy
ourselves. That human nature's fear and greed instincts and reflexes
almost inevitably spiral into a cavalcade of horrors.

The butterfly effect theorizes that a butterfly
flapping its wings in Beijing on one day can create or affect a rainstorm over
Chicago a few days later.

Likewise in a world where there is so much global
communication, and where automatic trading programs can respond to each other from anywhere on the globe, it's no wonder that market moves are
getting bigger, faster, and more volatile.

Perhaps governments are cooperating and collaborating because of a collective recognition that a new form of
protection is needed to dampen the increasing speed, size and leverage behind
market moves?

Have you noticed how correlated and coordinated actions have
been worldwide throughout this crisis? The concept of economic allies
presupposes that we also have economic enemies. It's easy to construct
a theory that countries like Russia and China are using financial
markets to exert leverage in a nascent form of economic warfare.

It is
also easy to construct a theory that says that we are the enemy
ourselves. That human nature's fear and greed instincts and reflexes
almost inevitably spiral into a cavalcade of horrors.

The butterfly effect theorizes that a butterfly
flapping its wings in Beijing on one day can create or affect a rainstorm over
Chicago a few days later.

Likewise in a world where there is so much global
communication, and where automatic trading programs can respond to each other from anywhere on the globe, it's no wonder that market moves are
getting bigger, faster, and more volatile.

Perhaps governments are cooperating and collaborating because of a collective recognition that a new form of
protection is needed to dampen the increasing speed, size and leverage behind
market moves?

This was a tough week for the markets. Strangely, it might soon prove to have been a good week for the markets as well.

So what is it going to take for the markets to finally bounce?  History shows
that most intermediate or long-term bottoms are characterized by panic
selling, hopelessness, and people simply giving-up.  If that is the standard, then we may be close.

Here is some of the evidence of the fear, uncertainty, doubt that often accompanies bottoms:

• This week reversed most gains from the prior week's rally and short-squeeze.
• The markets continue to flirt with lows for the year. 
• Because of the volatility and gaps, trading simply hasn't been normal recently. 
• The economy and the markets dominate news and popular culture. 
• This week, the President of the United States basically said that
  if a radical bail-out wasn't done, right now, it would damage our
  economy – and many others across the globe. 

However, as bad as the markets did last week, they held up
reasonably well considering how much bad news there has been and how
close to the edge things really were (or are). Also, while markets went
down, it was on lower volume than last week, and we didn't break last
week's low. 

The Calm After the Storm.  It's
also probably worth noting that, historically, periods of great
volatility are often followed by periods of much less volatility.

With that in mind, I do believe that the government will reach a
reasonable compromise to end the "Deal – or No Deal" situation very
quickly. It's also likely that this agreement and the liquidity that it
brings will give the markets some room to breathe and some fuel for a
meaningful rally.

On the other hand, there is a long way to go
from here to recovery. Some people see this as the end of the crisis.
At best, I see this as the end of the first step on the road to
recovery.

You Can't Bounce Until you Hit Bottom. 
There are many corollaries in nature. This troubling time created a
clearing. Much of the fear, uncertainty, doubt, and baggage from past
mistakes are being wiped away. Firms are closing, the landscape is
changing, Wall Street and our economy will literally never be the same
again. And, yet, this kind of clearing is often the catalyst to new
beginnings and fast growth.

Noise Reduction. 
When creating automated trading systems, one of the things that becomes
increasingly important is to recognize the difference between signal
and noise. Right now, there's a lot of noise. The markets, market
players, and even governments are spooked. Under those circumstances,
it doesn't take much to stir things up.

The bailout and worldwide
cooperation can be looked at as noise reduction. Temporarily, there
will be a forced and tenuous peace. The hope is that as things calm
down, people will make decisions from a stronger position (or at least
from a position that's less fearful than where they are now).

Remember, a journey of a thousand miles begins with one step.  Here's to progress.

This was a tough week for the markets. Strangely, it might soon prove to have been a good week for the markets as well.

So what is it going to take for the markets to finally bounce?  History shows
that most intermediate or long-term bottoms are characterized by panic
selling, hopelessness, and people simply giving-up.  If that is the standard, then we may be close.

Here is some of the evidence of the fear, uncertainty, doubt that often accompanies bottoms:

• This week reversed most gains from the prior week's rally and short-squeeze.
• The markets continue to flirt with lows for the year. 
• Because of the volatility and gaps, trading simply hasn't been normal recently. 
• The economy and the markets dominate news and popular culture. 
• This week, the President of the United States basically said that
  if a radical bail-out wasn't done, right now, it would damage our
  economy – and many others across the globe. 

However, as bad as the markets did last week, they held up
reasonably well considering how much bad news there has been and how
close to the edge things really were (or are). Also, while markets went
down, it was on lower volume than last week, and we didn't break last
week's low. 

The Calm After the Storm.  It's
also probably worth noting that, historically, periods of great
volatility are often followed by periods of much less volatility.

With that in mind, I do believe that the government will reach a
reasonable compromise to end the "Deal – or No Deal" situation very
quickly. It's also likely that this agreement and the liquidity that it
brings will give the markets some room to breathe and some fuel for a
meaningful rally.

On the other hand, there is a long way to go
from here to recovery. Some people see this as the end of the crisis.
At best, I see this as the end of the first step on the road to
recovery.

You Can't Bounce Until you Hit Bottom. 
There are many corollaries in nature. This troubling time created a
clearing. Much of the fear, uncertainty, doubt, and baggage from past
mistakes are being wiped away. Firms are closing, the landscape is
changing, Wall Street and our economy will literally never be the same
again. And, yet, this kind of clearing is often the catalyst to new
beginnings and fast growth.

Noise Reduction. 
When creating automated trading systems, one of the things that becomes
increasingly important is to recognize the difference between signal
and noise. Right now, there's a lot of noise. The markets, market
players, and even governments are spooked. Under those circumstances,
it doesn't take much to stir things up.

The bailout and worldwide
cooperation can be looked at as noise reduction. Temporarily, there
will be a forced and tenuous peace. The hope is that as things calm
down, people will make decisions from a stronger position (or at least
from a position that's less fearful than where they are now).

Remember, a journey of a thousand miles begins with one step.  Here's to progress.