The Markets Are About to Tell You Something

42 | By Shah Gilani

Most people seem to have a hard time understanding why the markets do what they do.

The only reason I don’t is that I’ve been trading professionally for 30 years.

Not that I “got it” when I started out. I didn’t. I had to learn. And I learned much of what I know the hard way. I made a lot of mistakes. I studied my mistakes, I still do, just as much as I study what moves markets and what I get right.

I’m always learning. That’s because everything changes. You have to always take in new data, mesh it with recent data, layer it over the past, and not ever think you know for sure what’s going to happen.

So, how do you do it? How do you understand what’s going on with different markets?

Here’s how I do it (and get it right a lot)…

It’s First and Foremost About the “Big Picture”

I synthesize all the big goings-on, all the headline market-moving news and data points, and I watch and “listen” to how the markets react.

Money moves markets, but psychology moves money.

Markets are living things. They have feelings; their reactions are a direct reflection of the psychological impact reflected in the buying and selling of traders (first) and investors (distantly second) to the goings-on that participants believe will affect the decision-making of other market participants.

It’s not about numbers. It’s about interpreting others’ reactions to numbers and news.

It’s first and foremost about the “big picture.” If you get the big picture right, you’ll generally be on the right side of the major trends. That’s where everyone should start – on the right side. That’s where I start. I might go into different iterations of the major trends and drill down and take positions on instruments within subtrends or the major trends.

But it all starts with knowing that I don’t know. Then I synthesize that with what’s out there and listen to the markets tell me how they’re feeling about all the same stuff they’re subject to.

What Markets Are Saying Now, and What I’m Seeing

Here’s a broad look at what I’m looking at, what I see, and what the markets are saying about these things.

Money moves markets, right? You better believe it. So, what’s going to happen with all the stimulus money that’s floated global markets higher since March 2009?

The Federal Reserve has been super-aggressive in its no-interest rate policy (that’s what I call it). Chairman Ben Bernanke has said they’ll keep it that way until the end of 2014.

But Fed Vice-Chairwoman Janet Yellen just said, “Maybe we will, maybe we won’t.”

That’s unnerving to markets that have relied on cheap financing for everything – from traders leveraging short-term positions because they can borrow at next-to-nothing, to corporations reengineering their balance sheets and chalking up great profits, knowing they can raise capital cheaply in the bond market and finance production and inventory building on wafer-thin borrowing costs.

As for the rest of the world, China has grown significantly on stimulus. They’re rethinking all that loose money in the system. Europe, too, has floated itself out of depth of a drowning-in-debt-death by pouring money on every fire everywhere. Upcoming elections across the Continent may change that mandate, as governments themselves may change to reflect the public’s changing perceptions of “Union.”

Less money, if that’s what’s ahead of us, is going to cause markets to stall in mid-air.

Europe is slipping backwards. Italy’s borrowing costs are rising again; Spain’s too. I’m watching what will happen (I already know) if the bond markets in Europe start taking hits. A lot of sick banks bought a lot of new bonds, and if they start falling in price, well, there’s the domino thing, or “contagion,” that is hanging out there on the edge of what-if.

Earnings in the U.S. will be telling – how markets react to the winners and the losers.

Alcoa Inc. (NYSE:AA) rose almost 10% yesterday on good news. But how hard will losers get hit? Will they fall double digits? What will the net effect of the sum total of earnings and corporate guidance say about the spring?

We’ve just come off an outrageous rally. We’ve been rallying since March 2009. Everyone’s talking about the bull market. I think they may have gotten ahead of themselves… just like the markets. After all, we are NOT out of the woods. We have not made new all-time highs. We may just be witnessing a bull run in a secular bear market.

Either way, I know that I don’t know what will happen next. But the markets are whispering that they’re tired, and I hear them loud and clear.

Can they gather strength and make an assault on all-time highs? Sure. But first they’re going to have to feel better enough to get back to where they were last week. If they try, and fail, to get back what they’ve lost in the past week, listen up, because they’re telling you something.

Look at what happened this morning. Futures were nicely higher, then the data points came out.

In a heartbeat the futures halved their early gains. And as I finish this, they’ve fallen to close to the flatline.

I try and give you my insights here. You have a few more today.

We’re at a pivot point. These next few sessions, the next two to three weeks, are going to be telling.

Look, listen, and learn.


42 Responses to The Markets Are About to Tell You Something

  1. Greg Hyde says:

    Shah – I really like your perspective and experience on the markets however you are not finishing the story. I know you have more to say about were the money is flowing or should be flowing shortly. So, please give us some more on were the smart money is starting to make it’s next move over the next serveral weeks. I am seeing many redemptions in equity mutual funds from advisors. Thanks

  2. Dan says:

    It seems your comments and insights are pretty much always negative. I have faithfully listened to you for two years now and followed your advice. I have lost money because of your negative outlook.

    • fallingman says:

      First, you can’t predicate your decisions on what you hear in free blogs. This guy is very smart, but it’s just one worthwhile input. You have to think for yourself.

      Second, if you aren’t gonna do that, at least listen carefully to what you’re being told. Mr. Gilani has been playing the big liquidity injections and has been long the markets. Based on what I’ve read, he STILL has long positions. What he has expressed is that he is holding stocks, but he’s getting a feeling in his gut that things are changing.

      I get that his message isn’t exactly BUY or SELL. It ‘s somewhat nuanced, but I’m curious…

      What message did you get exactly? “Pretty much always negative” doesn’t say much and the actual record of what he said is out there, recorded for all to see. You can see that he has NOT been negative on the markets. Quite the contrary.

      Mr. Gilani spends a lot of time talking about the rot in the system, but that doesn’t equate to being negative on the markets at any particular time.

      If I were Mr. G, I’d be hesitant to put out anything for free for fear that people would misread what he’s said and lose money. That has apparently happened to you. I’m sorry. It’s easy to lose money. I’ve lost my share, and I did it by being less than rigorous. You’ve been less than rigorous.

      It ain’t SG’s fault.

      • sandry says:

        I second your reply. I have never thought Mr. G was totally negative, only cautious. This market has been such that one can play the ups & downs. Most certainly a buy & go away won’t work. However, looking at the whole picture is mostly the wise approach as the winds can change rapidly. I have lost plenty by not being scrupulous about keeping tabs & NOT taking profits in a timely manner. When there is too much money sitting in profits I sell, take profits & buy when it goes down, which it inevitably does. Buy & hold has been dead for awhile now-time to wake up!

  3. jrj90620 says:

    The majority of people,everywhere in the world,look to govt to fix all problems.Govts have the OK of citizens to do almost anything.All these debts aren’t money debts,they are fiat debts.Govts can create fiat at no cost.That’s the big picture.Unless citizens complain about inflation, more than about unemployment,the central banks will continue their inflationary policies,driving up the fiat prices of stocks,commodities,real estate,etc.

  4. Kent S Howe says:

    I am a complete neophyte this point. I am getting VANTAGE POINT SOFTWARE. Hope it will be as good as it looks. I’ve just been playing in the penny stocks till now. Picking buys from stocks that make things work. Not oil or gas but the people who own the LPG pats on carbs/injectors.they hold over 30 covering pats.No big returns yet but ask me about then a year or two from now. Like #9 INEED MORE DATA! So far you seem to be worth listening to.We may talk again later. Thanks KSH

    • gravelcords says:

      Hope you get more out of Vantage Point than I have. After using it for about three months, it is not the “magic bullet” indicator that you need. What you need to do first is learn how to be a trader, and that means education.

      Wish I had spent the 5K on a futures class instead of the software, at least at this point (trading about 9 mos.). VP is just one (expensive) indicator to use, and until you really know how to trade, I would just stick with the classic indicators available with your platform (I’ve been using Williams %R successfully, and VP doesn’t even offer it).

      We should both be able to take more advantage of it down the road a bit (or it will become another of those expensive “lessons learned” in trading)

  5. Elizabeth says:

    This is an exceptionally helpful email for me. I would appreciate a continuation of this kind of analysis of the markets. I am a novice and need to learn as much as possible from you about how to understand the markets.
    This explanation, for me, was one of the clearest you have given us. Thank you. Elizabeth

  6. Charles Vintcent says:

    Throughout Europe (incl. the UK) politicians are losing credibility with the electorate. Watch the Greek, French and next year German election results and you will see just how ephemeral and weak the current leadership is in all cases. When the first country leaves the euro, there will be massive financial chaos at ordinary consumer/citizen level as well as a breakdown in law and order in many places, particularly the big city ghettoes. Gold, silver and the ability to grow foodstuffs will be the saviours of rural communities. It will not be a pretty sight, and one will be well advised to buy some protective device before the collapse occurs, because when it happens it will be very fast. Make sure you are friendly with your neighbours. Order will return after about six to nine months at the earliest, but the first year will be very tough. I should welcome any other suggestions for coping with the forthcoming mess.

  7. San says:

    I can’t read your column very well on my iPod because the type is so small, there is no Reader option and the screen won’t stretch. Can you do anything to improve this?

    • Steve says:

      Simple math here: small font is to a small screen as big font is to a big screen.

      Algebraically: sc/sf=bs/bf The proportional relationships of screen size-resolution and font size-resolution are direct. If you are able to reduce the resolution on your iPod you can increase the size of the font. However, you will get about three words per screen. I thought all Mac people knew this before purchasing.

      Perhaps tossing your iPod and purchasing an iPad will solve your dilemma.

      Of course put it on your credit card or use the recent app which allows you to use the iPod to purchase your new iPad before you toss it.

  8. Ron Umberger says:

    In vain we build the cities if first we do not build the man.

    Me think’s it is
    Hog in Trough
    Cock in Dunghill
    Moloch Game

    What does it do me to have gained the world and all it’s treasure to have lost my very soul.

  9. Louise Cave says:

    Shah, you have said a lot, flavoring it with an entertaining turn of phrase. But what have you said? That the market is volatile? That taurus may transform himself into ursus very soon? That means that at this time you aren’t sure either!

  10. Robert says:

    Shah, Always appreciate your outlook on the situation. As you write, its all about the “Big Picture.”

  11. Tony Waters says:

    To Louise Cave, yes Shah did say he wasn’t sure either. This is why he says to watch the next few weeks carefully. Regards, CanadaNorth

  12. Tom Hegarty says:

    Doom and gloom the punters say ? Where have you been these past years ?
    The highly skilled might make a bob or two but I’m not !
    Some of my shares were doing ok, I sold the whole lot about 2 months ago……the crash is coming……sticking plasters all over Europe and the patient is still bleeding to death !
    What do you think will happen then ?

  13. Benton H Marder says:

    A question. Given the known practice and technique used in hammering the price of silver, how do we know that the like manipulation is not happening to certain stocks. High Frequency Trading by computer programming can serve the same purposes of hammering or jacking of stock prices? These sudden rises and/or falls can be interpreted this way by suspicious minds that have been burnt in the past.

  14. Paul Browning says:

    This market is all about manipulation by the Fed in coordination with major investment firms. If you don’t believe that, take a look at the SPY one day chart (min.). Whenever the market starts to fade it gets boosted by a quick shot upward. This is even more obvious in the pre-session and after hours. I find it impossible to analyze a rigged market. I suppose if you know when the merry-go-round will stop it is a great time to be long. But, at some time it must stop and there’s going to be a crash that will make 1929 look like a birthday party.

  15. Clint says:

    I consider this among Shah’s best articles. Even at 64, I still love to learn. This was a knowledge-filled article delivered to a hungry learner in a teachable moment 🙂

  16. J.W. Gardner says:

    I used to have A great Respect fo SHAh,,, I also feel he only talks about the negative….Last summer or early fall the day the Dow hi 10,500, he was on Fox,, He said he would not be long anymore…..

  17. Lars Marell says:

    Thank you for bringing it up. I think we lost most insites to how to build markets. I have buit markets for 30 years. worked in 20 countries. Siemens, Philips, Texas Instruments and my own corporation.

    To build a market it is a very diciplined activity. You have to grt to learn the marke structure of the specific market/country. get the right people. Work out a pricing structure that alloes you, the Ssubsidery/agent company and the distributors to make money. That is the only way it works, to be the chepest. is no way to success, profit fro all is The OEM customers has to be handled individually. An example of differences in markets was England and Germany. In the UK the distributors often had 300-500 branchs. In Germany a large distributor ahd 20 to 40 branches, mostly regional. I the old Yugoslavia they had no distirbutors, but after hard convincing I got them started,a few, but profit motivated. In China I made a bet that they had disitrbutors and the people I worked with dinied it completely. After a day driving around in the 12 milj city we found one and I did win the bet!! 1986. I can write a book about marketing, profit motivated, but for now this is it.

    Lars G. Marell 239-849-1660

  18. Bruce Rae says:

    I am keen to know how much of the same money is trading in the market everyday. If electronic trading accounts for about 70% of all trading, then I assume that mostly the same traders are in the market everyday. I also assume the largest volume of this trading is made up by the professionals who need to keep making money in order to get paid. So, they are they trading against one another or trading in a pack, until a few decide to form a breakaway group. To me, so many of the patterns are mechanical, except the timing of the breakout. I also think the same traders try to dictate the sentiment of the market, and what a great time to do that with a job’s report on the day the market is closed. After the break, they create a selling panic, and maybe even better than they expected, because in just two days the prices were already attractive for buying again. There’s certainly room for another breakout upwards, but when do all these guys want to have a rest? Will they hang around for the Facebook IPO? Certainly, they’ll want a holiday before a greater force overpowers them all, such as when a real credit squeeze is signalled and a European country calls it quits. Is this all too far-fetched?

  19. Mike Victory says:

    The title is “The Markets Are About to Tell You Something” but after reading the article, it’s clear Shah has no clue what it is.

  20. Tom Hegarty says:

    I thought it was a universal truth, that if money was involved, someone somewhere is going to fiddle the system for maximum advantage. You can see this in all walks of life.
    The worrying part is when those placed to oversee fair play, can no longer be trusted.
    A breach of faith.
    So, will you the vast majority sit still for it ?

  21. doomdr says:

    Yes, i luv doom and gloom stories, let crash the markets and hope for contagion for cheaper asset prices

  22. JimC (James Collard) says:

    SG. To synthesize the life of a jungle, like the market, with its various species and tribes, all in one article, is a bit of a challenge even for a 30year veteran explorer.
    One might consider his point about the big picture being important for a person who happens to be lost in that jungle.
    The fact that there are ‘keepers’ like Bernanke, who can feed or starve, calm or frighten the animals makes him (and his words) highly significant.
    But the animals, themselves, growl or whimper (to the Press) and they must be studied to get a feeling for the market’s ‘hunger’.
    This, Mr.Ghilani has carefully written and as a preparation for a student, could anyone have done it better?

    • JimC (James Collard) says:

      add after ‘that jungle.’ It’s better to know the way to the river than which berries are better for eating.

  23. Barry Beer says:

    Hey, thanks Shah, I like your style. I’m a straight shooter too, only way to be… I always look forward to your updates… Thanks!

  24. Wayne says:

    One of your readers posed the question of what to do about the upcoming Presidential elections. While I agree that Romney would make a poor excuse for a President, I feel that it behooves every voter to realize that Congress poses a greater threat to the American middle class. Congress has aligned itself with big banks and big business (for their own financial gain) and has left the middle class to fend for itself. And we (the voter) have let them do it. We have let Congress set themselves up as the Permanent Political Class, and they believe they are an “elite” class, “entitled” to special privileges and are “above the law(s)” that govern the rest of us. And we (the voter) have fostered these ideas by electing them (Congresspeople) term after term. This has enabled them to develop relationships with big banks and big business that are beneficial to themselves and big banks and big business while harmful to the middle class and the taxpayer.

    The “Too Big To Fail” bank bailouts that caused the financial meltdown of the housing markets and the eventual recession would not have been possible without the repeal of the Glass-Steagall Act in 1999 by Congress (not the President). This opened the door for big banks to expand into more risky investments such as sub prime mortgages and risky mortgage insurance scams that put investor money at risk. While the bank bailouts were probably needed to save the savings of millions of Americans, the magnitude of the bailouts was excessive and costly to the American taxpayer. A lot of bank executives got rich on bonuses and stock options thanks to American taxpayer money. And the existing Congress has failed to address the problem because the big banks want to be free to continue their risky investing. So there is a good chance that the American taxpayer will again have to bail the “Too Big To Fail” banks out again in the future. And this is only one of the “scams” that Congress and big banks and big money have used to separate the American taxpayer from their money and increase the deficit. Three good books for every voter to read are: Winner Take All Politics: How Washington Made the Rich Richer And Turned It’s Back on The Middle Class by Jacob Hacker and Paul Pierson, Throw Them All Out by Peter Schweizer, and Greedy Bastards by Dylan Ryan. These books will open your eyes to the dangers of allowing Congress to set themselves up as the PERMANENT POLITICAL PARTY. Only we (the voter) can do something about this.

    We (the voter) need to resolve that we will vote incumbent Congressperson out of office when they come up for reelection. We need to start over with a new Congress that is dependent on “the people” for election instead of the big money. We need to look at who is buying the candidates election and thus who is buying the candidates vote. We need to send the message to big money that maybe they can buy the vote but it will only be there as long as the candidate is in office (one term only) and then the vote becomes far more expensive. But we need to send the Congressperson to office with a clear agenda set by the people who elect instead of the “empty promises” that the candidate made their platform for election. It will take time, but “we the people” CAN eventually take back at least some control of OUR government.

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