Buyers Scramble to Catch Up

 | Aug 29, 2011 | 1:10 PM EDT  | Comments
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Stock quotes in this article:

jva

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vhc

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cvv

USA Today has a headline that stocks are up today because market players are relieved that Hurricane Irene wasn't worse. If that is the case, then why were stocks up on Friday? If they had a high level of fear last week then, why were they buying then?

It could have been worse. They could have said the market is up because of Obama's new chief economic adviser.

The media always look for these simple causative relationships to try to explain whatever is going on in the market. They just look at the headlines and then come up with some simple argument to explain why the market is doing whatever it is doing.

It really is the market action that drives the news flow rather than the other way around. If we had negative action, then market commentators would be focusing on some negative developments. They would find a way to fit the news to whatever is happening.

I believe the main driving force today isn't the news flow but the fact that market players were too bearish and are not prepared for upside. Once the opening strength held up and the bears who tried to fade it were squeezed, the scramble was on to try to catch the run. The positive action fed on itself, and now we have some momentum in place. The longer we hold up, the more anxiety there is about being left out, and the more buying it creates.

We have had so many of these type days since the lows in 2009. I believe they are exacerbated by high-frequency trading, which has a bias toward momentum, which creates short squeezes.

In addition, these V-shaped moves have become so commonplace that they are probably self-fulfilling by human traders as well. I am certainly not nearly as fast to bet against this sort of action as I was a few years ago. Riding the low-volume, straight-up moves has worked well far too often and the action today is a classic illustration.

The trades I've mentioned lately, such as Coffee Holding (JVA), VirnetX Holding (VHC), CVD Equipment (CVV), etc., are working well, and I've taken some partial profits, but trying to put more money to work here is quite frustrating. I'll keep digging.

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