Another Friday gain led by the financials after a Thursday decline again led by the financials. This is now a regular pattern at least in the late summer. This pattern may have no long term meaning, but I think it could be sending a number of messages. First, we are in a period of low volume mostly driven by prop desks and their kissing cousins, the trading variety of hedge funds. With very little capital in the hands of specialists and other floor traders, few are taking the other side of any momentum. The significance of this is that under these conditions the market will appear to be more volatile, but volatility with low volume is not likely to be of significance. What may be significant in the rise in prices for financial service securities (stocks, bonds, CDOs) is that traders do not want to be caught with short positions when a Sunday night merger or acquisition is announced before trading begins Sunday evening in the Far East or Europe in the early morning. This fear of the traders may also be affecting the run of the week pricing for selective issues such as Lehman, etc.
The significance to these patterns for the long term investor is this is not your grandfather’s market. Many of the tried and true techniques of the past just won’t work the same way in the current market. Perhaps long term investors should use a +/- 5% box around the current price and only look for significance when a price breaks out of this volatility prison. That way the investor is distinct from the trader and will not lose his focus on long term results.