Wide swings - tight closes

Over the last couple of weeks we have has seen some large intraday drops and gains come back into a tight closing range on the S&P 500 (between ~ 1263 to 1267).  Other than the close on February 7th, over the past 7 trading days the S&P 500 has closed within that range.  During days like this, it is much easier to wait until the end of the day to make your decisions because during the day a wild market will eat at your emotions making it difficult to make a decision.

So, we have wild swings but the market hasn’t really gone anywhere for several days.  Something has got to give and it may be irresponsible of me to venture a guess, but since that is what I do, will guess that the market is going to move sharply one way or the other in within the next several days then, just to make it difficult for us, I’m thinking it will begin to move in the other direction.  We have seen this type of action recently in the U.S. dollar as well as in the S&P 500 over the past year.


                                   Chart provided courtesy of www.decisionpoint.com


Wednesday the new Fed Chairman Ben Bernanke will deliver his first report to Congress on monetary policy and this could ignite one of these “sharp moves.”  Since I already started speculating, I will go on as if you believed me and say that whichever side of the fence it is you are sitting on (bullish or bearish) this move will be a test for you.  If you believe we are going higher, will you be able to stick to your guns if we see a sharp move lower?  And on the other side, if you believe the market is going to move lower from here, will a sharp short term rally sway you?


                                   Chart provided courtesy of www.decisionpoint.com


These tests on our emotions make it tough to watch the market and, as I have said many times, is the reason I rely heavily on my indicators.  They don’t act on emotions like I do.  They just give me an unbiased view of the current market situation.  My interpretation may be biased, but the indicators are not. 

It’s like a roulette wheel that has just come up red ten times in a row.  You may say, “I’ll bet black because it is due”, or “I’ll go with the trend and bet red.”  But the roulette wheel neither cares where you placed your bet nor where it landed the last ten spins.  The odds of whether the ball lands in one of the 18 black slots or one of the 18 red slots remain the same as always (~ 47.4% with 0 and 00 on the wheel).  But take 5 of the black slots away from a roulette wheel and now you should be putting your money on red; no matter what you think is going to happen.  It could still come up black but you are going against the odds if you bet that way.

That is what my indicators do for me.  They say because this is overbought here, and that is at an extreme there, it is best to do this.  That doesn’t mean it will happen, but I want to have my money where my indicators tell me I am getting the best odds.  Of course you have to believe in your indicators or you don’t really know if you are making the best move based on the odds.

Many years ago in an Atlantic City casino, I watched a roulette wheel land on red 18 times in a row.  I won’t try to figure out the odds of that happening (As an example, the odds of 5 times in a row are 2.4%) but I remember betting black until I ran out of money.  Someone forgot to tell the wheel that it’s not supposed to do that.  Sort of like the market continuing to rally from extreme overbought conditions.  It’s going to do what it is going to do.  In the short term it can defy the odds, but in the long term things will even out.

It’s been a while since I’ve used one of my gambling analogies.  I used to talk about poker and blackjack all the time when comparing stock market speculation to gambling.  It was kind of fun.  I don’t want to go back to the boring indicators so I’ll end it here today.

That’s all for today.  Currently 100% G fund.  Thanks for reading.
 

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