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@theMarket: Sitting This One Out

Bill Schmick

Trading in the stock market right now is akin to having your pocket picked by a blind man whose pocket you just picked a moment ago. In other words, get to the sidelines if you aren't already there.

Gapping up and then down to the tune of 1 or 2 percent a day is not my idea of an investable market. And just about every day this week we have witnessed this sort of schizophrenic behavior. Those, for example, who may have been feeling pretty good about catching the market just right last week, have watched all their gains disappear.

This week the game was to sell the market down early Sunday night into Monday morning, then buy the lows, rally back up until Fed Chairman Ben Bernanke spoke on the economy on Wednesday, take profits after that, then rally back, in anticipation of President Obama's speech on Thursday night. But since no one really thinks the president will have much of a chance getting another stimulus plan through Congress, traders went short the market before the speech. Friday, of course, was a big down day.

Don't think you can outwit the pros in this game because most of the action is occurring prior to the U.S. market opening. By the time you get to put an order in to buy a stock or ETF, you are already chasing the price. And who do you think is selling this security to you? You guessed it, the prop trading desk that purchased it early in the morning in Europe or Asia. As the markets become even more volatile, traders are increasingly focusing on buying before the U.S. open, selling in the opening hour of U.S. trade, buying back when Europe closes at midday, and selling or buying again around 2:30-3 p.m. 

I've watched in amusement as the talking heads on television change their minds about the market on a daily basis, based on whatever the averages are doing on a given day. First they are bullish, then bearish. They like the financials and then they don't. Wouldn't it be nice if they just back off and admit they haven't a clue about what is going on? At least that would be truthful and honest.

In markets like this, where the fundamentals are practically impossible to discern, most traders rely on technical analysis. Buy at support, sell at resistance — seems easy — but in today's markets that concept has taken on an entirely new meaning. It is possible, thanks to computers, algorithms and software programs to identify technical levels to buy and sell on a daily, hourly or even minute-by-minute basis.

Make no mistake; you can make a lot of money doing that if you are on the right side of the market. The problem is most individual investors are completely outgunned, with none of the technology the big guys have to guide them in this exercise. You can lose a lot of money in a market like this. That is why I have advised all my readers to move to the sidelines and wait this out.

"But how long will this go on?" exclaimed one frustrated client.

The glib answer is as long as it takes. September and October are normally the worst months of the year for stocks, and so far that has turned out to be true. Europe and its problems are still very much in the forefront of investors' attention. Sadly, the news from across the pond continues to be discouraging. There are even public comments from some of the EU countries that Greece should be forced to exit the Euro. That is something that only two months ago no European leader would dare to say.

Over here, things are not much better. If we aren't already in a recession, we are within a hair's breadth of a long-feared double dip. Much will depend on what comes out of Washington and so far the news is not encouraging. Obama's $447 billion stimulus plan announced Thursday night was simply more of the same policies that have already proven to have no lasting impact on economic growth or unemployment.

Whether or not the GOP will go along with part of this plan remains to be seen. But the market has already given its verdict — it's not nearly enough — which leaves the Federal Reserve and its upcoming meeting on Sept. 20 to save the day. I'm stunned at how much weight the market is giving to this meeting.

Are we setting ourselves up for an even bigger fall? Will there be a QE III and if so will it actually do any good? I wish I knew, but at least I'm honest enough to admit that I don't know. And when I don't know I move to the sidelines, comprende?

Who said finance is boring?

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

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