Daily Summary Changes

I need to change my daily market summary a bit.

Keeping the “traffic light” indicators for both short-term and intermediate-term since they are bottom-up (not index-based) measures of whether stocks are oversold/overbought/trending/etc. Keeping the “sink or swim” indicators for my stock targets since these are bottom-up measures of how broadly I can focus my actual investment/trading decisions. Adding a new measure to replace the “up/down” summary.

Basically, there are three different kinds of “money managers” who influence price and volume in the stock and other markets. “Scalpers” and “market makers” earn their returns from the bid-ask spread and by providing liquidity. Arbs and hedge funds earn their returns by leveraging up (using free insider money from central banks) and arbitraging different markets (stock v bond, Europe v US, stocks v options, currency v stocks, spot commodities v futures v stocks). Finally, there are one-way investors — people who make money by going long or going short based on some perceived “mispricing” or “valuation” issue separate and apart from other markets or daily trading.

The first two groups tend to try to avoid changing the existing price. They may tweak it at the margins in order to pull out supply/demand. But their actions generally take the market fundamentals as a given. The latter obviously prefer to buy at a low price and sell at a high price and as such they have a vested interest in trying to change the existing price in a way that can benefit them.

I can’t possibly compete with the first two groups. But it is important to try to understand when they are controlling price/volume in the market. Because the actions of the first two groups result in a market that is NOT predictive/anticipative of the future. If it gets enough out of synch, then that sort of market can present an opportunity for me.

By necessity I must compete with the latter group. But as a tiny minnow in that pool (who can’t affect price/volume), I need to know when the larger sharks in that pool are “talking their book”. That way, I can more easily assess the credibility of information I receive from a variety of sources.

Simply asserting that “volume is up” or “volume is high” or “price is up” is not really helpful in achieving the underlying goal here. Too vague and meaningless and, more important, no different from the existing media nonsense (which can easily be manipulated by large sharks with PR agents) about markets.

Still need to think about how exactly to summarize this. Floor traders do use “pivot points” and other trading strategies in order to manage the supply and demand on the floor. High-frequency traders use computers and leverage to move arbitrage from a multi-day activity to an intra-day activity. Volume, generally, will be externally-driven — except for the potential to “run stops”. More on this later.

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