Tuesday, October 20, 2009

Slumps and Rallies

Volatility has returned to acceptable levels, yet a clear bull market is not in evidence. The bears are not entirely comfortable either. The lack of a clear direction seems like a particularly good time to exploit as many market anomalies as possible to achieve the ultimate long strategy - buy low and sell high.

End-of-week slumps and beginning-of-week rallies unfold fairly consistently in the U.S. markets as short-term traders shed and then re-establish positions. This anomaly is becoming pronounced again as short-term traders are returning to the stock market with greater confidence and higher asset commitments.

A second short-term calendar effect to exploit when set up or divesting positions is created by money managers as they attempting to dress up returns for the end of the reporting period. The stock market appears to rally in the last few days of the month as institutional traders place timely trades to “mark up” positions. Banks and insurance companies also step up trades to use up cash before the end-of-the month cash sweep. The flow of money into 401Ks is a bi-weekly occurrence and tends to push up institutional trading and prices as the new cash must be invested.

The recent tumultuous period in the U.S. stock market made such fine tuned trading unnecessary. Now as the market returns slowly to calmer times, it is possible again to consider these short-term slumps and rallies in establishing and shedding stock positions.

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