Tells and the Silent Depression

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How can we 'read' market action? Sometimes 'tells' help us. The biggest tells could include many factors, from market dynamics (breadth, beta, TRIN) to individual stocks and markets as a whole.

A small book (hard to find) called "Method in Dealing in Stocks" reinforces the notion that "it's not the news, it's the reaction."

The more the gubmint tries to insinuate itself (FNM, FRE equity buys, prohibition of short selling, etc) the worse the market does. Why would that be? Maybe it's Humpty Dumpty Bernanke sitting on the Wall Street changing his story every month? You can't drive by looking in the rearview mirror.

Here are some tells (admittedly a lot). What do YOU look at intraday?

• Breadth. Breadth is conviction.
• Volatility. Contracting volatility is bullish and expanding volatility not so much.
  
• "Safer" versus "Riskier" ETFs. XLP and XLV versus XLK and XLY. Shorthand. VP (conservative) versus KY.
• N's or S's? NDX versus SPX
• The US Dollar. Obviously, gold and silver especially tend to move against the dollar.
• Pure price action. Are rallies embraced or sold? Do your favorites live above or below the 20 period average of five minute charts intraday?
  
• Key stocks. The biggest and baddest is Goldman Sachs.
• Interest rates (falling tens usually means that fear is ruling)

For a 'bottom' to occur what might have to happen?

• Additional major financials go under (bodies). Piecemeal "lying" about writedowns (losses) isn't cutting it.
  
• BAC has to stop getting crushed
• Market pundits have to stop pounding the table to buy. Tony Dwyer came out yesterday with another bullish call. Abby Joseph Cohen basically did the same the other day.
• Volatility has to spike into the prior 'fear' levels.
  

The VIX keeps trying, but then gets pounded down by optimism.
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Short sellers add a contrary opinion, liquidity, and fuel for rallies if their 'price discovery' is wrong. Because many feel that the financial sector remains vulnerable, short sellers have flourished. Volatility traders do trades like buying calls and shorting stock to hedge. The regulators appear to fear price discovery.

Asset allocation pivots
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What are the root problems?

• Corruption in the banking/mortgage/securities industry that led to fraudulent loan activity and poor business practices.
• Hedonic data that doesn't reflect 'true' economic activity (employment, inflation)
• Policymakers who believe their own inappropriate data and act on it.
• "Herding" that causes investors to move en masse both up or down
• Fundamentals. Phil Gramm's "Phil pas' reflects accuracy that the top few percent of the economic food chain isn't feeling pain. What percent of the bottom aren't feeling it under the strain of food and energy prices alone, coupled with housing price stress (mortgages) and job loss. Is the bottom 25 percent of Americans in the "Silent Depression"?

Will the 'way out' end up being a New Deal type infrastructure commitment (energy, roads, bridges) along with a budget balancing effort to shore up the dollar and pull back from open-ended foreign policy commitments?

The powers that be inside the Beltway from the executive to administrative branches don't get it. Which is why investors are getting it in the neck.

Good trading and great risk management to all.

Educational use only. Never intended as investment advice.