There is an old Wall Street adage that the amateurs play the market open and the pros play the market close. My experience has shown this saying to be true, and valuable information can be taken from the behavior of the market closes. Let’s see what recent market action has been telling us.
Reversal of Fortune
Yesterday, the market stormed out of the gate and was looking fairly strong the entire day. It was a classic relief rally after a swift selloff over the past several days. The Dow was up anywhere from 60-80 points for virtually the whole day, but then gave up the ghost in the last twenty minutes or so to actually close in the red for fifth straight session. Some pundits pointed to the Bernanke testimony which didn’t hint at QE3 for the reason, but I don’t think that’s quite accurate.
In a bull market, the indices usually close out the day at the highs of the session. A typical day will consist of steadily uptrending action followed by a flurry of buying at the closing bell. On the other hand, bear markets often start out strong in the morning as impatient traders pile into the market in the morning in hopes of buying low, only to see the pros sell stocks late in the day.
For so long traders have been conditioned like Pavlov’s dogs to buy the dips, which becomes a self-fulfilling prophecy. This has clearly reversed during the markets pullback from its highs. Going forward, traders will be hesitant to stick their necks out when the market falls, which creates even more downside.
Morning Futures Useless
Watching the S&P Futures in the morning can be a misleading strategy. During bear markets, the pre-market futures are often indicating a positive day because of bottom fishing from the previous close’s declines. However, the smart money knows that it is how the market finishes that tell the real story. Make sure not to base any trading decisions on pre-market futures, as it is a fool’s game. Remember that it’s not how the market starts that matters; it’s how it finishes.
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