Confusion at the 11:00 Snapshot

by Jay Pestrichelli on December 10th, 2012

About a month ago, on November 6th, I wrote about a day of confusion where titled: How Could Everything be UP Yesterday?  It outlines how all asset classes were on the rise as well as many indicators. Well the same is going on today. As of 11:00 ET today Stocks are up, Bonds are up, Gold is up, Volatility is up, and Oil is up (although only slightly).
Days like this are an illustration of market confusion. Last month it was the Presidential Election day and the market just couldn’t decide what was going to happen. Looking back, we know how it turned out. November 7th and 8th saw a decline of almost 4% in just two days and fear of the fiscal cliff began. It’s not surprising that with only a few weeks left in the year, the market is looking at this situation in the same way it did back in November.
As we said last month, though we typically classify the bonds as the large institutional money, options as the sophisticated money, commodities as the speculative money and equities as the mainstream money. However unfortunate it may be, stocks usually end up on the wrong side of these days. It’s not that the mainstream masses are wrong or uninformed; it’s just that they don’t have the size to outlast the highly leveraged commodities, bonds and options markets. Stocks may win out at the end of today, but give it a day or two we’ll probably see the leveraged plays force their will on stocks and push them lower.
When we see bond buying and gold buying we know traders are running to safer pastures. When we see volatility rise it is usually due to put buying on stocks, which is either outright bearish or just protective hedging on stocks. Interestingly enough, we are just about at the same level on the S&P now, 1419, as we were the day of the election, and today's mixed market could result in testing the lows we saw just a week later at 1355.
These short-term observations feel a little too much like market-timing, something that we don’t subscribe to or are very good at doing. But we do like to watch short-term trends to help us determine the development of longer term direction. And when we see an indicator like this, it's something that we work into the mix as we determine when to adjust hedges and how much to pay for them.

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