From The CME Trading Floor: It's Quiet... Too Quiet? Nah

Includes: DIA, QQQ, SPY
by: Vikram Rangala

As I worked today in the MrTopStep office across from the CME, I kept hearing the same thing from traders taking a break from the floor. One 40-year vet stopped me in the hall and growled, "I was on the floor today. It sucked!"

I thought, "Well, he's started early." But I heard it from others all day: "Nothing's happening," "Nobody's taking a risk," "It's dead." Everyone was waiting for someone else to go first.

And I saw it on the chart: thin volumes, choppy price action, the kind of volatility you get when there aren't many orders to slow down the market's momentum.

Think of momentum in physics terms (or don't). Momentum is mass x velocity. So a thing can be heavy and move slowly and have a lot of momentum. Or a thing can be less heavy, but move faster, and have the same momentum.

Since the market wasn't heavy today, even a small order could push it further in a direction or even make it change direction. The six-point plunge just before 3pm CT, for example, had very little volume. (The MiM, by the way, predicted the upswing after 3pm beautifully.) That's the volatility we saw today. That's why the VIX went up after two weeks of sleepy decline.

Reasons and Reason

So why were so many not trading? There are as many answers as there are expert pundits. Actually more. Put two pundits at a table with a TV camera and they'll generate three answers.

Ours is not to question why. Ours is but to sell and buy.

The delay of military action in Syria, positive manufacturing numbers in China and (surprise!) even India. Waiting for the Fed to announce how much tapering they'll do. Gold prices dropping. All of these get mentioned as reasons for the sluggish markets.

Well, we're already at war in Afghanistan, China has been a manufacturing powerhouse for years, the consensus is already settled on the taper: $10 billion, enough to send a signal but not enough to spook the market.

Gold. The trend is down. No, no buts, it's down. Stop acting surprised.

As for gold, is a downward movement really a surprise to anyone who hasn't been in a cave since summer of 2012?

Is it the weak recovery in Europe? Uncertainty in the oil market? Something to do with Obamacare? Yes, no, maybe, all or none of the above? As I've said before, ours is not to question why. Ours is but to sell and buy.

Truths That are True

There are some definite truths. Smith Barney ended its floor trading and pulled its people out. Fewer people actually on the floor can make the floor quiet. That much we know.

Another definite truth is the dominance of electronic trading, which people say is ending floor trading as it has in smaller exchanges in Europe. But is the move to electronic trading even so bad? Is all this nostalgia for live humans trading with hand signals just a modern equivalent of blacksmiths longing for the days before automobiles? Maybe someday we'll just leave global finance in the hands of supercomputers.

But not yet. Because we still need SEC and CFTC regulation that stays current with the latest technology. We need the free markets to be free again, free from corruption and monopoly. Until then, we need humans to keep the price action at least somewhat in line with reality. Credit default swaps showed us what happens when we try to trade works of fiction.

Optimism, Facts, and Self-Confidence

We can fall back on two bits of reality, one fundamental and one technical. The fundamental truth is what Warren Buffett expressed: In the big picture, the American economy is better than it was 100 or even 10 years ago. The budget deficit, for example, is 35% smaller than a year ago.

On the left is the Dow 100-year chart Buffett mentioned. Note that the scale is logarithmic; a linear scale just wouldn't fit, we've grown so rapidly. And the world has grown with us.

Technical traders like me can always return to one principle: The only truth is price. When a buyer finds a seller and they agree to a trade, that's a real thing. It actually happens and the "because" is clear. Because they both agreed the price was right.

That's it. If the buyer carefully considered the ramifications of possible mission creep in Syria and the seller weighed the effects of the taper on the recovery of the Indian rupee, it matters no more or less than if the buyer was feeling inspired by Miley Cyrus' youthful twerking on MTV and the seller was feeling concerned that the Duchess of Cambridge might not lose her baby weight. Buyer and seller shook hands and agreed. A price got printed. End of story.

E-mini S&P futures (hourly)

Let's look at a picture of all those price-agreement stories laid out over time. Is the trend up or is it up? (It's up.)

Taking this big picture view, it's easy to see the drop in August as a correction, not a "plummet" or "plunge" or… pick your own word from the financial journalist's thesaurus. It needed to digest that long rally and it did. And now it's headed back up.

Could it top out in the 1680s and do another "correction?" Sure. A short-term Fibonacci retracement of the last rally has a 61.8% level around 1660 and a 38% at 1670. In fact, I won't be surprised to see the 1660s tomorrow. We see support levels at 1640 and our old friend 1625, as well as a longer-term Fibonacci level of 1611.

Could it even go as low as 1560 again? Don't get suckered into one of the least fun trader's games: telling the market what it can or can't do. The market can't hear you.

In a longer long-term view, the drops seem tiny and entirely within the trend. In this picture of all the buyer-seller handshakes since last summer, a move back up to 1700 looks different now, doesn't it? Maybe almost inevitable?

How Does 1760 Look?

So when you see the hand-wringing about the Fed or China or Syria or Apple or the demise of the floor, keep in mind the point of view of the person talking. Floor traders are bound to be upset, they feel like waiters and chefs at a half-empty restaurant. And TV pundits need crisis to sell advertising. "All is well, relax" is nice to hear but lousy for ratings.

You don't have to fear what others fear. One of my principles is, if you can master your own emotions, then the emotionality of others (including the market) becomes your weapon. Which brings me to a third and final bit of reality you can have faith in.

I said, you can have faith that the economy is getting better in the big picture, not just in the US but worldwide, because human civilization evolves. And you can have faith that price is truth, possibly the only truth. Optimism and facts. Two things you can trust.

Add to those articles of faith one more: the faith in your own ability to master your emotions. It takes time and attention, but you gain power and peace of mind you didn't know you had.

Master your emotions and volatility becomes something you enjoy, because it brings more profit and fun. Guessing and predicting become an amusing habit that others cling to, and you avoid. And because you do these things, the trend becomes your friend. You trust it because you trust that your optimism is justified, your facts are correct, and your mind is your trusted ally. Even in this too quiet market no one can explain.

Disclosure: no active trades or investments at time of writing.

Relationships: the author is not affiliated with the CME Group.

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