If you are an S&P trader I am prepared to bet you are struggling right now.  I know I am.  As I wrote earlier this year, if you can tread water without giving too much back that is a great outcome in this environment.  I regard myself as fortunate to be hanging around within a tiny percentage of equity highs – up a bit one week, down a bit the next.  This is frustrating for sure but preferable to being in a big hole.

I speak with quite a few traders and I have not found any that have been making money in this market recently – not a single one.  A few are holding their ground like me and most are grateful to be doing so.  But the majority tell me they are going backwards, a few to alarming degrees.

Why is this?  Didn’t we used to pitch up to work each day and most days go home with a profit?  Every trader recognises the drop in volatility over recent months and for sure this is not helping the situation.  But there is another factor in play here too, one that has even more impact on our ability to earn a living today – volume.

Many traders get confused by volume.  I often see traders saying “oh the volume today is quite good”, when actually it is dreadful.  They make the mistake of looking at the future volume, when the volume that really matters is the volume in the cash market.  Why does cash volume matter, when we trade the futures?  Simply put, the futures are going nowhere without the cash market.  So if the cash market is dead, no one is going anywhere.  In addition much of the futures volume is just computers trading contracts back and forth between themselves, skewing that picture even further.

So cash is king as far as volume is concerned, so what has happened to it of late?  Basically volume has halved over the last few months as you can see in this chart which shows a 30 day average of the NYSE daily volume:

2bn shares per day drop to just 1bn

It is almost a decade since we last witnessed volume this low and that isn’t even the worst problem.  A decade ago it was OK for the volume to be at this level as that was normal volume in those days.  Today we are geared up for much higher volume.  In other words we have over capacity!  Any other industry that saw its volume halved would be taking its begging bowl to the governments of the world asking for bailouts!

But market makers, traders, short term liquidity providers suffer in silence.  Most blame themselves for at best not making money and losing money in many other cases.

So what should we do about it then?  Well we all have different portfolios of activity, but I can share my thinking with you.  Firstly I looked at my activity and did a crude cost/benefit appraisal.  It wasn’t a great feeling either.  I have 2 main activities – short term trading the S&P and swing trading in a range of commodity markets.

• The S&P occupies 7 hours per day, transacts considerable turnover and hence incurs considerable brokerage costs, yet has been dead flat profit wise for months.
• The swing trades occupy 30 minutes a day, are on small size so have little cost and have made great profits every single month, in fact the last losing trade was in November!

Hmmm, time to adjust the game slightly I think!

As for the S&P dilemma, here is a wonderful analogy one of my partners uses to describe the situation:  Imagine a visit to your local village market, where stall holders are selling all manner of different products – food, textiles, shoes, picture frames etc.  In this market we are selling bananas.  We buy them for 12p and sell them for 15p.  When the market is busy we do this all day long – buying wholesale, selling retail if you like.  But when the market is quiet or the people in the market are only interested in buying slippers or picture frames, our bananas are just sitting there.  It doesn’t matter that the price we are offering is the best price in town.  If people don’t want bananas we are stuck with them until the end of the day we cut them down to 8p just to clear the shelves!

Solution – let’s just sell slippers!  If that’s where the action is.  The product is different, but the process is the same.  We don’t need to be slipper experts as we are not actually banana experts.  Our expertise is in the process not the product – in buying wholesale and selling retail.  So until bananas come back into fashion, let’s move to a product that is in fashion!  That is exactly what we are going to do.  We will still keep a few bananas (S&Ps) on our stall, but concentrate more of our effort each day on a new product.  What will that product be?  I’ll share those thoughts with you next time.

For the commodity swing trades, we decided to increase our trade size by 50% now and to consider a further increase in another 3 months time.  If we hadn’t had such a good run, I would have considered a bigger increase right now.  But sooner or later we will get some losers so I would prefer to ratchet the size up in stages.  If we double or triple our size in one hit I know that will instantly precipitate a couple of losers – I am sure you know what I mean!!!

By the way, these swing trades are the S-I-R system that many readers have expressed interest in using themselves.  The good news is we are launching it right now after all these months of delay.  I have a handful of traders working with me, trying it out and making sure everything is working well before I invite any more members to join.  If it all goes smoothly then later this month I will open up a few more places.  If you have registered interest previously then you can expect an invitation over the next few weeks.  If you haven’t but would be interested in taking a look then www.SeriousInvestmentReturns.com is the place to go.

If you are primarily an S&P trader, don’t despair, things will improve again it’s just a question of when.  Until then have a think about where else your skills could be usefully applied.  Remember this – in the old days if a market suddenly died for a while a floor trader could walk into a different pit and work in a market where there was activity.  These days all we have to do is press a few buttons to achieve the same transition, yet for some reason we are more reluctant to do so.  Why?

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