Monday, August 31, 2009

Midday Briefing for August 31st: Settling Down After a Drop

After a high-volume decline early in the morning, note how the market has since slowed down and drifted into a range just above the lows from 8/27. When we see relatively high volume (i.e., volume that is above average for that particular time of day) turn into relatively low volume (volume that is subnormal), it suggests that institutional traders have largely withdrawn from the marketplace. That leaves the market to the relative control of short-term market makers, including algorithmic programs operating close to the market. That can give the market trendless choppy action that is difficult to trade.

It is not unusual to see large traders stand back from the market the day before an important economic release or event, such as a Fed announcement. In this case, traders are looking ahead to the ISM release tomorrow morning. There is a wide range of expectations for the number, ranging from slightly below 50 (economy contracting) to nicely above 50 (economy expanding). Not wanting to get run over by a number outside of consensus, it's not surprising that money managers pull in their horns ahead of the release.

When that happens, we can generally anticipate an active trade after the event or release, as money managers jump back into the market and respond both to the news and how markets are responding to the news.


Tim Hesselsweet said...

0.4 =absolute value of t-stat on difference in means from 1030est to 4est in SP futures (1999-present) whether ISM is greater or less than expectations. In other words, (on average) the ISM number doesn't matter to the day's trade. Of course you always assimilate data in fresh and interesting ways so will be curious how you approach this afternoon and tomorrow.

Brett Steenbarger, Ph.D. said...

Great observation, Tim. It's precisely the difference between perceptions/expectations and actuality that creates some excellent trading opportunities. What I'd be looking for after ISM comes out is a possible mismatch between the released numbers relative to expectations and how the market trades after the initial reaction.