Balance

by Larry Levin

Balance. What is balance? Specifically, what is balance in the market? Surely there are many ways to describe this but when it comes to balance in the day-trading markets we prefer to portray it as the area where most of the day's volume occurred. In other words, wherever about 70% of today's volume traded one could argue that that is precisely where investors believed the market was in balance - or contained the proper "value" with respect to the prior day's news.

For example, if there were only three very rare cars on the face of the earth, with a value of $1 million each and one person owned two of them, I doubt that there would be any daily fluctuation of the value of these automobiles. They are knowingly rare, in good hands, and not for sale. However, if there was a fire that destroyed the two rare vehicles that were owned by one man and therefore there was only one left on the planet - we all know that its value would explode above its recently perceived "value" given this fresh bit of news. The news has changed pricing environment - the price "balance" has been...well...unbalanced given the new news.

Surely this is an extreme example, however, this is also how the stock market works when there isn't an insane amount of intrusion from the Fed and Treasury.

If the market believes that a morning report will show, for example, an unemployment report of -300,000 jobs (and prices it in of course) and the report "only" reveals a loss of -250,000; doesn't the market often react positively? The market was in "balance" around a price level that reflected a job loss of -300,000 and then trades above the prior balance area due to the new data like the car value above.

Each day the market tells us what it believes that days "value area" is, which is (essentially) 70% of that day's volume. Let's do an experiment and see if the market is properly pricing in the daily news and if that news is affecting the markets daily balance - or "value area." Tuesday's perceived value area in the S&P500 futures was 1168.00 to 1160.50. So if logic were to stand one could imagine the market would stay relatively still in this "balance/value area" if the current day's news wasn't too crazy - so to speak.

Let's see. The following are Wednesday's news bullets...

1) Portugal debt is downgraded and on watch for further downgrades bringing the cascading event of European & American bank failures closer to reality...as well as other sovereign debt downgrades.

2) Greece debt said to be defaulted on soon...not bailed out.

3) Durable goods data was 50% worse than anticipated.

4) New home sales plunge to NEW ALL TIME RECORD LOW.

5) 5%-YR Note auction is terrible - interest rates spike.

That's all NEW information as of Wednesday - mostly Wednesday morning - and yet the market yawned. That's right, the market saw all of this (NEW) news/data and made absolutely no change to the perceived "balance/value" area of Tuesday. In fact, traders were so cozy with the terrible auction, higher interest rates, sovereign debt downgrades and the rest, that 95% of Wednesday's range was INSIDE of Tuesday's perceived area of "balance."

Right. Uh-huh...as if that news makes NO DIFFERENCE whatsoever to the next day. It was still in balance with the prior day's news? Really?!?

Whatever. This is such an amazingly rigged BS market that it is almost not worth discussing any longer. In fact, if this happens again we may as well discuss some thing like chicken soup recipes. I like mine with carrots.




Previous Day's Trading Room Results:

Trade Date: 3/24/10

E-Mini S&P Trades*
(before fees and commissions):


1) No "secrets" trades filled today.

2) Algorithm positions (13)

3) "Reading the Tape" positions (7) ...combined Secret's, Algo, & "Reading the Tape" total...+0.75



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