The Butterfly Effect

The Butterfly Effect.

Being ahead of the curve means that sometimes you have to exercise patients. Six months ago I wrote about program trading and it effects on the market. Nothing has changed with over 50% of the daily volume ruled by program trading. Today market commentary mentioned program trading as the cause for the triple digit drop in the market. I warned long term investors about the “IDES of MARCH“, which happens on 3-8-04 thru 3-24-04 causing the sp500 index to drop 69 points and the Dow index to drop 671 points.
While some would say program trading was the cause, why isn’t program trading to blame for inflating the market? The precipitous drop only violated the 50 day moving averages in 2004. Meanwhile, there was ample support at the 200 day moving averages for the market to recover the lost ground in 2004

This year, 2005, program trading is still ruling the market. During the IDES of MARCH, the Dow dropped only 493. The sp500 dropped only 53 points. Unlike 2004, this market continued it’s drop hugging the 200 day moving average for 9 more days, then dropping another 3% for the sp500 and 4% for the Dow. The FED is still behind the curve, always, still raising interest rates. Alan is playing his clarinet keeping the market bubble from popping until his retirement. Oil has broken the $65 a barrel price tag, gold is climbing higher and the CBOE’s Vix is breaking above the 200 day moving average. I have watched the Fed’s “plunge protection team” supporting the market with buying sp500 futures, causing the market to miraculously rebound from a losing session to preserve the “technical indicators”.

Today’s FED plunge protection team couldn’t save the market today, and maybe they won’t save the market until September comes along. I know the market is very choppy with computer program trading buying and selling, base only on the number of points in the indicies. There is definitely a lack of retail buyers in the market, a sure sign that we could be heading for a 1987 crash. Notice how we have not hit the trading curbs like we did often in 98, 99, and 2000? You know why? Program trading is restricted to less than 10k shares and that will cause these money managers to be locked out of the market. If you are a money manager sitting on a million shares, it will take a long time to sell those shares only selling 9999 shares at time. You also can’t buy and extra million shares to dollar cost average your holding when the market has hit the curbs. The NYSE has some interesting stats if you have time to dig around in this massive site. The important link is this one if you are day trading or a long term investor. program trading
So a butterfly flaps it’s wings in Venezuela, causing a tropical storm to become a hurricane, heading for the oil wells in the gulf, oil prices skyrocket with labor day, back to school, and northeast heating oil production begins siphoning off limited supply of gasoline. Meanwhile, the Fed will hike interest rates another quarter point, causing massive re-financing, home prices dropping, banks margins get smaller like 1929, and so on….

Or the butterfly dies because of the pesticides they are spraying to kill the west Nile virus, there are no more tropical storms, we strike oil in Anwar and the caribou population explodes to record level due to the warm pipeline which keeps them warm in the cold winters. Iraqi vote for a constitution, and there begin pumping and dumping more oil in the market causing oil price to plummet to $30 a barrel. Intel invents a completely new chip, make all computers obsolete. There is a national sales tax and not income taxes, stocks begin to pay dividends, because earnings mean nothing if you are a long term holder stocks unless they pay you for your loyalty. Program trading will be banned, illegal immigrants will buy your parents homes for double their current value, causing a new baby boomer generation of Spanish speaking citizens. There will be peace and prosperity in the middle east.

Or….????


God Bless

Doc
www.doctrader.com