The Traders are in Control
March 20, 2009
The stock market has seen a 15% advance in a week. Make no mistake that it will retreat from that level because the traders are in control. These are the professional guys who buy a billion shares, get fifty cents a share and pocket 500 million. If all of that sounds foreign to you, it should. These are mutual fund managers, money managers, hedge fund guys, etc. They are not Joe and Jane Six Pack struggling to make the mortgage payment.
Because the traders are in control, it is difficult to be an investor. Now, an investor is the guy who puts his money in the market through his 401k program and does it for ten, twenty, even thirty years. This is the guy who has seen his portfolio go down 40% over the last year. The trader is in it for ten minutes; not ten years.
Here is how this works.
When the market goes up; it’s because the trader bought it; when the market goes down; the trader sold it. That is the kind of market we are in.
What should you do? Buy when it goes down. When will the traders no longer be in control; when it is no longer a trading market, and that means when the economy can sustain itself higher. When GDP resumes an upward bias; that is when the Federal Reserve will change course and start taking liquidity out of the economy instead of putting trillions into it.
We are not there yet. The market, if history means anything (it does), will see six to 9 months ahead and break out of the trading range and stay there. If the consensus is right, we should start to see a reversal in GDP at the end of this year; even Ben Bernanke said that could happen. If that is accurate, then the market should break through its resistance and out of the control of the traders, sometime in the July to September time frame. In the meantime, this market will stay in the control of the traders. If you are not prepared or you cannot afford to trade the market, patience will be required. If you are prepared to trade (translation; lose money quickly and not worry about it), this is the time to pursue that strategy.
In any event, the challenges are not over even when we break out of the trading bias. We will still face massive deficits caused by the stimulus packages and global inflation going forward. With a healthier economy led by a healthier banking environment, we should be able to weather those storms, but first things first. We are stuck in a range. My advise is don’t fight the tape.
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