Wall Street Actions Interpreted

Yesterday Dow went down 280 points presumably because investors found bad news on Fed Open Market Committee's notes. Then how do you explain today's action, up 240 points, did investors find good news when they read the notes again?

No, none of the above, the market has it's own little brain, it can go up or down without any obvious reason.

So how can we read the news to make any judgement of the market? It turns out that you don't have to, let the big guys do the readings and make their move and we just follow them, it's called following the smart money.

It turns out that big guys like to buy when we are all scared. In order to find out when we the small investors are scared, they compiled an index, called Fear Index VIX. Very, very smart money read all the news make a prediction and buy or sell the index. So how many of us know the existence of the VIX, let along trading the index by future options?

Now, even for the big guys they are still categorized into two groups: Commercial (very smart) and Large Traders (not so smart, trend followers). Because they are so smart and have so much money, SEC ask all of them to report their positions every Friday. Just to show you how smart the Commercials are, from July to mid-August, the commercial traders were big buyers of the VIX index. As you can imagine, in the middle of subprime turmoil the fear index grew from 10-15 up to 35, they made a lot of money. However, in the mid-August, the VIX peaked and the smart money reversed their position, start selling the index. How smart they are, indeed.

Now, look at the VIX index itself, it's very spiky, registers all the investors emotions, it has a distinctive characteristics: whenever there is a big jump, up or down, creating a hole, the hole will always be filled!

Okay, last Friday for some reason, investors extreme optimism pushed Dow to the overbought region.

Back to the market behavior, as I said, the big guys really like to buy when we are in panic selling. Mid-August's action was a violent selling followed by a big reversal, everybody knows that it was a bottom. But when it comes to buy stocks, the big guys are as shy as a three years little girl, they won't start buying until the bottom is re-tested. Because eventually the market direction is determined by supply and demand. If at that price level, there are more buyers than sellers, that is a bottom. There is only one way to find out, the MM is going to run the market down until it hits a point where a lot of buyers jump in, they are pretty sure that's the bottom, last a few days the volume is thin, so we are not there yet.

Tuesday's action actually created a hole on the VIX index, that's why I was pretty sure the hole will be filled. It came as a surprise that the hole was totally filled today and we enjoyed a bargain hunting session with low volume. Before Labor day the low volume is pretty normal. How will the market force unwinding in the future? We will keep an eye on the smart money. Please come back, I will put a link on the indices I talked about.

Good night everybody,

Swimmer