Trouble Ahead: “As for the timing of trouble, we should have our eyes glued to the stock market. If or when the Dow breaks below 12,000, that would be my first danger signal. Below 11,000 on the Dow would be my second danger signal. And below Dow 10,000 would be my signal for “all out trouble.” In the meantime, we wait and watch and avoid doing anything stupid like loading up on stocks.” – Richard Russell – Dow Theory Letters
A Useful Fiction: Everybody Loves a Melt-Up Stock Market
A sudden sharp decline in stocks may not thrill retail investors, but it would be catnip for big trading desks that used the melt-up rally to get short.
One of the more useful Wall Street fictions is the naive notion that big players and small-fry equity owners alike love low-volatility “melt-up” markets that slowly creep higher on low volume. The less attractive reality is that big trading desks find low-volatility “melt-up” markets useful for one thing: to sucker retail buyers and less-adept fund managers into an increasingly vulnerable market.
Beyond that utility, low-volatility “melt-up” markets are of little value to big trading desks for the simple reason that there is no way to outperform in markets that lack volatility. The retail crowd may love a market that slowly gains 4% for the year, barely budging for months, but such a market is anathema to big traders.
It’s always useful to ask cui bono–to whose benefit? In this case, highly volatile markets don’t benefit clueless retail equities owners, as they are constantly whipsawed out of “sure-thing” positions.