Thursday, September 01, 2011

A Circular Hiring Squad

Every morning before the American stock markets open, I look in Yahoo Finance at the set of charts in the upper left hand corner of the page to see what has happened overnight in the Asian and European markets. These can often give a hint about what kind of day may be ahead in the American markets.

If the Asian markets are up by 1 percent and the European markets are up by 2 percent, a very good day may be ahead. A good day to sell, for a contrarian. If the foreign markets are dreary and drearier, then the American markets may open below their previous closes and perhaps also head down all day. A good day to buy.

Just as Americans watch the Asian and European markets, so Asians may watch the European and American markets to inform them about their day. European traders may likewise watch the prior American market close and then the Asian close to see a hint of what may be coming for them.

It's like three cats chasing each other around a tree. Each keeps the next one going. If one tires, that allows the cat behind him to slow down and rest a little, and the cat behind him as well. If one speeds up, the cat ahead will also speed up, and then the cat ahead of him.

This forward propagation of ups and downs provides a sense of momentum, a sense of mass. There is inertia in the stock market. Yet it's really just good news - or bad news - going around in a circle.

If every trader were a contrarian, buying on the downs and selling into the highs, would this inertia disappear?


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