Wednesday will be the first time people will have the opportunity to trade their changes in sentiment due to Sandy, Europe, and the election. The market almost never goes this long without trade and that can lead to a healthy skew between sentiment and portfolios. Of course keeping the markets closed prevented wild swings in the market and will most likely lead to a rational open. The interesting thing will be watching how trade evolves after the open as the market starts looking forward to employment reports and elections.
As everyone knows, the markets have been closed for two days. In many ways this was a blessing for countless participants because it stopped them from making stupid and emotional trading decisions. Keeping the markets offline through the duration of the storm prevented low-volume and fear from triggering volatile swings in the market. Stability in is essential in cultivating investor confidence and was a major factor in the decision to keep the markets closed even though the exchanges had the backup resources available to continue electronic trading.
Not having pricing information for four days has left a lot of holders nervous about the value of their portfolio, but with markets waiting to open until after the storm dissipated and everyone has a better sense of the damage will greatly decrease the probability of a fear induced selloff.
The one thing about having the markets closed it is prevented us from getting a read on what other traders were thinking, and more importantly how they were positioning their portfolio. Being closed for four days let people’s opinions and sentiment drift away from how their portfolio is positioned. Wednesday we’ll see a lot of trading bringing sentiment and portfolios back in line.
We can look to global markets for clues on how we might open on Wednesday. Europe struggled Monday, but rallied nicely on Tuesday due to some good news in that part of the world. The dollar also weakened versus major currencies and the pattern over the last few years has been a weak dollar boosts equity prices.
There has also been a fair amount of talk that while the storm will negatively impact economic activity in the near-term; the rebuilding boom will boost economic activity for some time to come. It will be interesting to see which half of the glass the market focuses on when it opens. Often the markets are really good at looking past the present and pricing based upon future expectations, especially when present events are fairly well quantified.
A lot of my trading ideas come from swings in sentiment and how that affects trading, but while we’ve seen wild swings in sentiment over the last few days, no one has been able to trade their emotions. While this is a good thing for most people because trading fear is usually a bad idea, it is taking away a trading opportunity for anyone willing to pounce on that emotional market crack.
This is purely a guess on my part, but we could see one of two potential trades tomorrow. The market could open up as investors look at the silver lining and anticipate the economic boom from rebuilding. Or the market could open lower if investors who felt trapped by the closed markets just want to get out.
I don’t know which side will win that tug-of-war at the open, but I suspect the market will then trade the rest of the day in the opposite direction of the open. So if it opens strong, it will selloff through the day. If it opens weak, it will rally through the day.
Based on some of the trader commentary I’ve picked up on over the last couple days, my gut senses a lot of positive talk and it feels like the market will open higher, but that optimism could fade through the day and stocks decline from that early high. The question that needs answering is who will buy after that early pop to keep the market headed higher? And with everyone on edge after the storm, selling could beget more selling throughout the day.
But either way, there is no reason to force a trade tomorrow and Sandy will be ancient history by Wednesday afternoon, as the market starts obsessing about employment and the election.
As a bull, I’m rooting for a healthy selloff over the next few days to get all those half-empty people out of the market so the rest of us can start focusing on all the opportunities ahead of us.
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