Good Day Fellow Traders,
I have the distinct pleasure of coming to you with the Friday feature blog this week and what a week it has been. Actually it has been a heck of a month and really a heck of a few of months. We have seen a pretty solid recovery from the lows of March and if you look at a chart of the S&P 500 you will see a very common pattern in the market and I am here to give a little insight as to perhaps why we are seeing this pattern play out.
So first we need to talk about the pattern we are seeing. The pattern I see is a slow drift upwards or as the picture would describe a slow float upwards. We have some volatility back in mid-June which is evidenced by the larger more aggressive candle types that can be seen on the chart of the SPY. Ever since then, we have just rolled up on the index with small uneventful candles just hugging along the 9 EMA very calm like. This reminds me of an event that is held every summer where I live. It is called the big river float down. A bunch of folks make all sorts of makeshift vessels and then float down the river enjoying the sunshine. It sounds quite nice and it is until… Before I finish that story let’s bring this back to the markets.
You see traditionally at this time of year, that being summer, the markets find themselves just floating along and this is due in part to a lack of liquidity and volume. Summer is the time in which the professionals take a breather from the markets and head out to the hamptons or wherever it is they go and the markets almost go into sleep mode. This lack of movement causes the markets to float up at a slower pace because there is always money coming into the market from the sidelines through automatic investment plans from employer sponsered savings and retirement programs and this is where we get this slow drift upwards.
Now, back to the story of the river float down. In the morning the float down is very peaceful and a time for great revilry and fun. That is until the current in the river picks up or the makeshift crafts start to fail or the winds pick up and then things can go from serene to scary in a hurry. Even though this can happen lots of people still participate in this event with neary a care in the world. This seems a lot like the stock market in these dull days, its just floating along without a care in the world until…
As described above, the conditions of anything seldom stay that way for long. There is always something that comes along to wake up the markets and the reek havoc on the float down as well. Seasonally speaking this time of year is fraught with danger. If you take a look at the chart below you will see a seasonality component to it and you will notice that mid-way through August the markets tend to get a little soft. This is a 20-year chart of the SPY and therefore there is lots of data to crunched to come up with the seasonal expectations. I can totally understand the feeling that some folks have right now and that is that this market seems invincible and is going to go up forever, but I would say many of the participants of the float down also thought they were invincible and then had to be rescued by the coast guard at a substantial cost.
I think one of the best skills one can aquire in one’s lifetime is to learn from others mistakes instead of always learning from our own so take the lesson that the floaters gave you and be cautious especially when no one else seems to be.
Trade well and float on!
Coach Holmes
Chart of the day
