October 20, 2008
By Michael Markowski

It would be an understatement if I were to say that the stock market has been experiencing high volatility since the middle of September. The fact is that volatility readings have been way too high for way too long. I expect that the high volatility will continue and this is a HUGE problem. Why? The violent swings are chasing out everyone but the scavengers (professional short sellers and day traders) out of the stock market.

As the volatility steadily increases or remains high more and more of those who use fundamentals or technicals (price and volume charts) to invest are leaving the stock market. Those entering the stock market for the first time, the neophyte investor, does not stand a chance in this market. As investors depart the scavengers will increase their dominance over the stock market. Upon the scavengers reaching total domination the global stock markets will become casinos. In the end the scavengers will find it difficult to trade profitability as the house or the specialists on the trading floors will be making a majority of the profits.

With the departure of the fundamentalists and the technicians it will become increasing difficult for mutual fund managers to raise cash for mounting redemptions. With few if any real bids for shares the outcome will be that the market will swing violently for the last two hours of trading everyday when the mutual funds are required to place all of their sell orders for redemptions. The market will experience a few intermittent up days. However, that is only because the specialists must have a way to re-sell their long positions and reestablish their short ones. The key indicator to watch is the market’s price action in the last two hours of the day. If it continues to be highly volatile this is an indication that there is little liquidity in the markets.

Since it is likely that soon there will no longer be a floor under the market due to the constant stream of fundamentalists and the technicians who are departing I expect that the stock market will breach the lows that were made on Friday October 10, 2008. I also would not be surprised to see the stock market significantly lower by the end of 2008. I am advising everyone to batten down the hatches.

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