Dancing with the Stocks
By Jeff Clark
September 11, 2007

Most of the time, traders can count on the stock market to lead them gracefully around the dance floor.

Buy, sell, cha-cha-cha... Profit, loss, cha-cha-cha...

Like dancing, the stock market has a certain rhythm. The movements may be subject to interpretation but there's often a "fluidity" to the motions. Lately, however, the market has been awkward and out of step – like a balding white guy at a Soul Train dance contest. And that makes it difficult to make money... even if you get the moves right.

Take yesterday for example...

On Friday, the market closed down 220 points in reaction to news that U.S. employment fell for the first time in four years in August. That sort of a stock decline on a Friday afternoon almost always leads to further weakness on Monday morning.

But the brokerage stocks – the stocks that normally lead the market – were surprisingly strong on Friday. Most of the stocks in the brokerage sector lost only a few pennies per share. That's quite an accomplishment when the rest of the market is getting hit hard.

So I had a feeling that Monday, and the rest of this week, could be biased to the upside.

S&A Short Report subscribers were hanging on to some puts that I originally recommended two weeks ago and then re-recommended last Tuesday. It was a modestly profitable position, and I wanted to take advantage of any early weakness yesterday to exit the trade.

Two hours before the opening of trading yesterday, the futures market was lower. Stock prices looked to open flat to slightly down, which would have given us a good opportunity to unload our puts at a nice profit. So I wrote up the sell recommendation, and subscribers got the report about one hour before the opening bell.

Fifteen minutes before the music started, however, Intel (INTC) announced higher third-quarter revenue guidance. The futures rallied, and the market opened at the high of the day... cha-cha-cha.

We still profited on the trade, but it would have been a much larger gain if we'd sold two hours later – or if Intel had waited a couple of hours before jumping onto the dance floor.

By the end of the day, though, it didn't really matter. The puts closed just about where they opened as the market rallied during the final hour of trading. And the upside bias that I was anticipating finally took hold.

The point to this whole diatribe is that the music is changing. The stock market isn't dancing to the same tune that's been playing since 2003. We're still watching a tango... The dancers still begin and end the dance in a passionate embrace. But the movements in between are all herky-jerky, clumsy, and difficult to predict.

So traders have to adapt. We have to learn the new moves. You can't dance the jitterbug when the market wants a Macarena. And you can't expect to profit by waltzing into a mosh pit.

No matter how volatile the market is, there's still a certain rhythm – a certain fluidity. Our job is to learn the style that fits best in this environment. And we'll profit well by doing so.

See you on the dance floor.

Best regards and good trading,

Jeff Clark