BORING!!!! and Window Dressing

So boooorrrrring. Yup. It's been boring. Couple of structural reasons for that though. I cover one of them in the second part of this post. But with the 4th of July pending and the end of the quarter, the market is boring.

First, the reasons. 4th of July is notorious for traders and trade desks being evacuated at the end of the day today. Every Biff wants to leave for their beach house in the Hamptons before the peasants flood in. This leaves trade desks managed by junior traders who are allowed to do, well, nothing. So it is rare to see big moves in the overall market the two or three market days preceding the 4th. This is part of the whole "Summer Doldrums" thing.

Secondly, we have the end of the quarter. EOQ is not a time to make outsized bets with capital. Managers are more concerned with locking in gains or window dressing (see below) than they are with actually doing work. The indexes are the big players but that trading is all programmed. From Reuters:

"the March 31 refresh of the fund's positions involved about 120,000 S&P 500 options contracts set to expire on June 30, including the sale of nearly 40,000 S&P 500 options contracts with a strike price of 4,320, just below where the index is trading today.

With the S&P 500 just above the 4,320 level, the sold call options mean options dealers – in this case large banks or financial institutions - are induced to buy equities when the index drops underneath that level and sell when it moves above it, said Brent Kochuba, founder of options analytics firm SpotGamma."

One of the toughest things to do as a trader is NOTHING. Our entire lives we are evaluated on production, on activity. But trading pays to be selective and wait. Extremely counterintuitive emotionally and psychologically. But taking trades now often translates into "reaching" for trades just because you want to "feel" productive.

My advice? Fight the urge and after PAYX reports, turn off the screen and take a break. It is good for the mind and the psyche and can help your mind be clearer. That's what I am going to do.

Do not mistake activity for success - thats almost always not true.

Window Dressing

So you've probably heard me talk about "Window Dressing" and wondered, as with many things coming out of my mouth, what the heck is he talking about? Let's look at the classic "Santa Claus Rally" to explain.

Mutual Funds have the end of their fiscal year October 31 normally. They then do distributions in November and December. More importantly, they will sell in October to lock in their gains because the managers want to get their bonuses for being mediocre. So they sell their winners AND they sell their big losers. Then, toward the end of November and into December, they buy back the stocks they want to keep. Thats the structural reason for bad Octobers and the Santa Claus rally. Yes, its that simple. Traditionally the Santa Claus rally is defined as the last 6 days of the year and the first 2 days of the New Year. However, one would have to accept that ALL the managers wait until the last 6 trading days - no they don't. I wouldn't wait if i were one, wouldyou?

Also, its important to note that Christmas is usually a time for good emotions and feelings as is the New Year. That has an effect also.

Managers don't sell all of their winners though because it wouldn't look right if they sold the entire position and then bought it right back. But, they have excess cash lying around in November and December that they have to put to work. It's truly a simple supply and demand event.

Now, ends of quarters are a bit different. At the end of each quarter fund managers DO sell their losers but more importantly, they buy the names that have been hot. Why? Because when they put their report out to investors they want to be able to list names that investors have heard about in the news. Yup. Thats called window dressing.

One more thing: when I was in the business, we would always say its time to buy SOYH during times like this: Sit on Your Hands. So, go long SOYH and enjoy the free time. July 5th we get back to work and more normal trading.

theBoss