01 October 2013

SP 500 and NDX Futures Daily Charts - If You Don't Know Who the Sucker at the Table Is...

There is an old poker saying that if you don't know who the sucker is at the table, it is probably you.

Quite a few people remarked their puzzlement today about the rally in stocks and the hit on the metals. It seems counterintuitive that 'investors' would embrace risk on a government shutdown and shun risk havens.

You have to understand the nature of the game in order to understand what is going on.

In the short term, this market is about as rational as a crooked roulette wheel. The market insiders can see what the broad public is holding and the numbers in which they are holding it.

Yesterday there was a big spike higher in volatility as shown by the VIX. What that means is that people were seeking safety in puts.

Pros rarely direct their bets in one direction but lean toward spreads and other things that diverge and converge, unless of course they have fixed the results somehow or have access to asymmetric information and then bigger directional bets make sense. This is how big firms achieve 'perfect' trading records, which of course would be impossible in a 'free market,' where freedom implied honesty rather than a lack of rules and oversight.

So, the smaller specs piled into puts and other downside bets ahead of the shutdown, the big insiders saw it, and they bid the markets up today to clean them out of their positions. That is what happened. Note the plunge in VIX today. As I say, 'wax on, wax off.'

Should you start 'thinking like a criminal' as some say? Better than guessing stay the hell out of options and other short term leveraged bets in this market and let the insiders try to cheat each other. Amateurs have no business in the futures or options markets.

I suspect the thinking is that the shutdown will be short lived and that there will be no consequences. That *might* be correct as it is how things often go. But I am not so sure this time will be just like that, for reasons which I will elaborate on in the gold commentary.

Have a pleasant evening.