Read-b-2

[aaljawal]

The wild card on our side is now the mutual fund community.
Historically the last five days of October are used for end of
year window dressing. There is a flurry of activity and most
selling is already out of the way. This coming week is reserved
for buying winners as a sales tool for fund shoppers. Many funds
have October as a year end and this provides the incentive. Also
historically the best six months of the investing year begins
Nov-1st and many investors have made fortunes by using the
strategy of buying in Nov and selling in late spring.

While you may not subscribe to this theory it does exist. However
the January effect was once a valid investment tool as well. That
strategy has gone the way of all prior repeatable trends. Once
they are commonly known traders try to beat the trend by buying
earlier and selling sooner and the trend disappears. The January
effect moved into late December then early December and then into
the Thanksgiving week. Recently it has faded from view as buying
and selling became more spread out. The end of October trend could
be the next sacrificial offering. As traders buy earlier and earlier
to capitalize there is nobody left to buy during the last week.
Funds are not stupid, at least most of them. They plot these trends
and attempt to profit from them. Those that wanted to profit from
the last week of October would have bought over the last two weeks
and they would sell into any window dressing next week. If the
window dressing does not appear then funds who had speculated on
it would still be forced to sell rather than hold stocks they had
no long term desire to own.

For traders the markets have been very exciting to watch. Lower
openings with acceleration into the close. Poetry in motion!
Volume on Friday was even decent with the NYSE trading over 1.2
billion shares and the Nasdaq nearing 2 billion. Decent, not
strong. Advancers beat decliners even on the Nasdaq which lost
ground on profit taking on a couple big caps. The comment was
heard several times last week that happy hour had been moved
up to 3M in the markets as the last hour has produced some
strong moves. From a technical and sentiment standpoint the
markets have been performing extremely well. Investors are
counting on fiscal stimulus, tax cuts and increased government
spending to bolster the economy and keep it from crashing. The
GDP is estimated to be reported next week at -0.8% but nobody
appears to care that the recession will be confirmed. They are
looking 6-12 months into the future and counting on the rate
cuts to provide long term growth again. Historically once in
a recession the markets tend to do very well over the next 24
months and investors are taking that bet. It is the decline
into a recession that crashes markets and we have already seen
that chapter of this movie.

Investors are so positive that earnings will improve shortly
that they have ignored the continuing anthrax news and weak
economic data. It is tough to fight the tape when it powers
through all the bad news we have had over the last several
weeks. This bullishness has a catch. The VIX closed at another
post attack low of 30.53 and lost over five points for the week.
The VXN is now at pre-attack levels and could break under 50
next week. Granted the monstrous volatility we have had over
the last several weeks has created havoc with bid/ask spreads
and increased premium prices, the threat of it collapsing is
also real. When everyone lines up on the buyers side in the
markets there is nobody left to buy. Once the current buyers
are fully invested they need new buyers to push the prices up
to the next level. If there are no buyers ready to pay higher
prices then the rally will fail. Falling volatility means that
nobody is buying puts to protect their positions because they
do not expect the prices to fall. Great if it happens but
Murphy is still alive and well.