Welcome to the Machine

 | Feb 05, 2013 | 1:45 PM EST  | Comments
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Doug Kass' line about the market not having a memory from day to day definitely applies today. It went from a gloomy, trend-down day to an upbeat, trend-up day on no significant news. If anything, the news was negative due to poor earnings reports from YUM! (YUM) and Baidu (BIDU).

This sort of inconsistent action is another good example of how computerized trading has come to dominate. Humans may have mood swings, but the pattern of shifting every other day smacks of computer algorithms trying to catch market players out of position.  Yesterday and last Thursday, the computers kept the pressure on, which scared out some bulls who had grown overconfident in their dip-buying. Today and last Friday, the computers squeezed the bears who have been anxiously anticipating a market rollover for weeks.

The fact that the action has a tendency to trend the entire day is another tipoff that computers are in control. When you have out of position traders on the ropes, the computers tend to push their advantage, which is why we see these V-ish moves so often.

The best way to deal with this sort of action is to simply be aware of what is driving it and don't try to impose convention logic. One of the main reasons I continue to stress staying with the trend is because it is so obviously computer-driven and likely to go to extreme levels.

One of these days, the trend will turn and the computers will work in reverse, but right now they caught a lot of bears by surprise and are working very hard to pick their pockets once again. We are hitting day highs as I write and usually if we stay this strong this late in the day, we end up with a good close.  

Don't fight the machines.

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