Most people seem to have a hard time understanding why the markets do what they do.
The only reason I don't is that I've been trading professionally for 30 years.
Not that I "got it" when I started out. I didn't. I had to learn. And I learned much of what I know the hard way. I made a lot of mistakes. I studied my mistakes, I still do, just as much as I study what moves markets and what I get right.
I'm always learning. That's because everything changes. You have to always take in new data, mesh it with recent data, layer it over the past, and not ever think you know for sure what's going to happen.
So, how do you do it? How do you understand what's going on with different markets?
Here's how I do it (and get it right a lot)…
It's First and Foremost About the "Big Picture"
I synthesize all the big goings-on, all the headline market-moving news and data points, and I watch and "listen" to how the markets react.
Money moves markets, but psychology moves money.
Markets are living things. They have feelings; their reactions are a direct reflection of the psychological impact reflected in the buying and selling of traders (first) and investors (distantly second) to the goings-on that participants believe will affect the decision-making of other market participants.
It's not about numbers. It's about interpreting others' reactions to numbers and news.
It's first and foremost about the "big picture." If you get the big picture right, you'll generally be on the right side of the major trends. That's where everyone should start – on the right side. That's where I start. I might go into different iterations of the major trends and drill down and take positions on instruments within subtrends or the major trends.
But it all starts with knowing that I don't know. Then I synthesize that with what's out there and listen to the markets tell me how they're feeling about all the same stuff they're subject to.
What Markets Are Saying Now, and What I'm Seeing
Here's a broad look at what I'm looking at, what I see, and what the markets are saying about these things.
Money moves markets, right? You better believe it. So, what's going to happen with all the stimulus money that's floated global markets higher since March 2009?
The Federal Reserve has been super-aggressive in its no-interest rate policy (that's what I call it). Chairman Ben Bernanke has said they'll keep it that way until the end of 2014.
But Fed Vice-Chairwoman Janet Yellen just said, "Maybe we will, maybe we won't."
That's unnerving to markets that have relied on cheap financing for everything – from traders leveraging short-term positions because they can borrow at next-to-nothing, to corporations reengineering their balance sheets and chalking up great profits, knowing they can raise capital cheaply in the bond market and finance production and inventory building on wafer-thin borrowing costs.
As for the rest of the world, China has grown significantly on stimulus. They're rethinking all that loose money in the system. Europe, too, has floated itself out of depth of a drowning-in-debt-death by pouring money on every fire everywhere. Upcoming elections across the Continent may change that mandate, as governments themselves may change to reflect the public's changing perceptions of "Union."
Less money, if that's what's ahead of us, is going to cause markets to stall in mid-air.
Europe is slipping backwards. Italy's borrowing costs are rising again; Spain's too. I'm watching what will happen (I already know) if the bond markets in Europe start taking hits. A lot of sick banks bought a lot of new bonds, and if they start falling in price, well, there's the domino thing, or "contagion," that is hanging out there on the edge of what-if.
Earnings in the U.S. will be telling – how markets react to the winners and the losers.
Alcoa Inc. (NYSE:AA) rose almost 10% Wednesday on good news. But how hard will losers get hit? Will they fall double digits? What will the net effect of the sum total of earnings and corporate guidance say about the spring?
We've just come off an outrageous rally. We've been rallying since March 2009.
Everyone's talking about the bull market. I think they may have gotten ahead of themselves… just like the markets. After all, we are NOT out of the woods. We have not made new all-time highs. We may just be witnessing a bull run in a secular bear market.
Either way, I know that I don't know what will happen next. But the markets are whispering that they're tired, and I hear them loud and clear.
Can they gather strength and make an assault on all-time highs? Sure. But first they're going to have to feel better enough to get back to where they were last week.
If they try, and fail, to get back what they've lost in the past week, listen up, because they're telling you something.
I try and give you my insights here. You have a few more today.
We're at a pivot point. These next few sessions, the next two to three weeks, are going to be telling.
Look, listen, and learn.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.