Why Can't I Make Money In This Market

Well not me - actually you - I've cut back on my trading because of some things I don't like about the dynamics of the market and the time of year. But the last 4 or 5 months have seen some record gains in at least one index and for the rest of us some mediocre, at best, profits. My reader (thanks Mom) wants to know why.

The best excuse I can come up with is that we are dumbass day traders and had we simply invested (yes, Virginia, I said "invested") our fund (only rich people have "funds" most of the rest of us just have "fund") in the Q's back on July 26th we would have seen this happen.



And we would be living happily ever after. (Note how I cleverly pointed out a blow-off bottom way back then - yes, you even get them on the daily charts). We would have went from 36 and change to 44 and change and could have had a huge party.

Instead we tried to pick at the market and find places where we could make a quick buck and what we were fighting against was this -



Or chop-chop-chop for most of the time since the run-up began. Chop does two things to you - first it destroys your confidence and second it destroys your trading account.

I read this chart this way - for about the first 20 days of the run it was a long's delight because the market continued up unabated. This period, of course, was the rebound from the previous declining period - a rebound is generally robust. Then we went through about 50 days or so of chop. This was followed by a second period of smooth running and then a relatively easy time for the shortists over the past week or so.

The biggest problem with chop is that volatility disappears. It doesn't just get low it becomes non-existant. If you get the same volatility reading within a couple of cents every day for weeks on end that means that there is no volatility. I.E. nothing is moving. But actually what it means is that while some things are zigging - enough other things are zagging so that volatility remains benign. I attribute this to the 8500+ funds that currently prowl the market using automated technology looking for every sign of weakness both long and short.

Here is what volatility looks like during a period of chop. This is the VXN which is more or less the same as the VIX but since it relates directly to the NASDAQ I thought it would be more appropriate for use here.



You can see that at the beginning of the 6 month run there was a lot of volatility, that damped off to just about nothing during the choppy period but recently it started moving again. One other thing that you can see in this chart is how volatility moves somewhat contrary to the market. This goes back to Bollinger's statement that low volatility begets high volatility and vice versa. It is obvious what he was talking about when you look at the figure.

I believe that volatility is the real reason that we have been struggling lately - the lack of any meaningful volatility means the market wasn't moving very much. Hopefully with its apparent return we will see some market movement that will be meaningful to our trading accounts.