Head and Shoulders

Lots of talk in the last week or so of “head and shoulders”. Many markets are forming this legendary trading pattern and several mature markets have “broken the neckline” – meaning this could be the moment for the fall in equities that many predict. Moreover as this piece points out, the Vix is doing strange things with it’s moving averages.

It might be thought that this is the equivalent of reading coffee grains but if the game is to guess what everyone else is guessing about everyone else’s guesses … then why the hell not!

If we follow this then the stock market is not the result of an objective random news generator, the process of which analysts set out to discover, but rather an exercise in group psychology! If only it were that simple.

Talk has also re-surfaced of the dark forces of the Plunge Protection Team. This is the White House appointed team has the right to intervene and support US stock indices. Widely assumed to have been very active at the start of the crisis in an attempt to prevent the stock and housing bubble bursting at the same time. Their presence is most often invoked when quiet end of day trading on down days gets sudden boost, usually when Europe and Asia have gone home and volumes are thin. Wilder rumours also hint that certain insiders get tipped off, they presumably would then lend their weight to the rally and earn the profits of doing so. Who knows?! The political economy of the US certianly includes close ties between state and finance capital as the appointments and events of the crisis have shown.

In the coming week or so we have option expiries and earnings announcements. If financial proces are as arbitrary as the above isn’t it earnings that will bring them back in line with the forces of production? Well, not really when what really matters is i) where expectations have been managed to, and ii) what the companies tell us they are predicting for the future. So still a decent amount of guess work in there.

Once you start seeing head and shoulders it seems it’s rather catching and you start to see them everywhere... MacroMan sees one in the MSCI today although the neckline isn’t broken yet.

Today you could buy 850 strike, July expiry, S&P puts for $2.8 on igindex. This is a statement of fact not investment advice. As discussed, prices might go up, might go down, might be politically influenced, might not. Pretty arbitrary actually.