Basketballs and The Market?
Posted by MC on Jun 26, 2008
You start with a basketball from Walmart bought at the reasonable retail price of $10. At some point the owner signs the ball Michael Jordan and claims to be selling a MJ signed ball. The bidding goes up because what was worth nothing and was common, is now all the sudden deemed a rare piece of memorabilia triggering peoples emotions and greed. As the bid goes higher so does the interest in this item, it must be worth even more otherwise why would people be so interested right? The advertised price is now extreme and the original seller, knowing it was a fake, prances away with $990 in profit. Now the new owner only bought it based on his greed, so he turns around to try and sell it for $2000. Only now there is no COA (certificate of authenticity) and people are questioning the validity of the signature. Now his offers are now in the $500 range, because there’s still a slight chance it’s legit and greed tells bidders they could still resell for profit. Fast forward…it’s been exposed a phony signature. The bid collapses and now is back to being worth $10. The owner tucks it away for a few years till he has a garage sale. There someone buys it for $20 despite being told it’s a fake. The seller is just happy to get some money back, and the shady buyer knows the signature is passable. The new owner opens an auction with new naive customers who know nothing of the prior auction. What do ya know, he sells the ball for $1000 again, and the cycle repeats over and over.
Of course there’s allot more in the markets movement than a clear cut point A to point B. This is a simplistic look at things to say the least. One thing to take from this may be that what transpires in the middle is essentially noise and greed driven. The greed portion can linger on for quite some time, as long as the hope of selling for profit is around. Now on the other hand, the extremes of the range often have quick reactions thanks to fear being the stronger of the emotions.
Another reason I feel this is a fair depiction of the market is the fact that the ball holder creates the bag holder. This market is not a fair game, there is deception at work. The “smart money” in the market preys on “dumb monies” greed and fear. “Not fair” some would say, well no, but what in life is fair? LOL
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The 2 Chains of Supply and Demand in Speculative Vehicles
Posted by MC on Jun 25, 2008
The market doesn’t sell goods nor services. It runs on hopes and dreams of profit
We’re trading/investing in a pretend slice of a company or contract with the hope that enough people will be joining us on our side of the see saw to profit.
The issue with this see saw theory though, is there really are 2 supply & demand chains at work in these non tangible markets. Since there are no hard goods, the scales can be tipped or manipulated by those with deep pockets. Maybe to a lesser extent on futures with no real limitations on open interest. But certainly heavily with stocks where there’s a set amount of shares to soak up before you’re in relative control.
So instead of this…
We have this…
I’m not saying it’s a must we over complicate things as a daytrader or even short term swing trader. But in general it’s very beneficial to learn to read the accumulation and distribution patterns of big smart money. I’m sure since this dual S&D chain is nothing I’ve seen talked about, many will think I’m a bit crazy. I won’t argue that, but I will argue that there is absolutely 2 chains at work in the speculative markets. 
Chain 1 (Smart Money)…
1) Smart/big money accumulates low (Chain 2, step 2), in gradual increments in the downtrend (once they start to see a value imbalance and the dumb money begin to throw in the towel).
2) A large portion of the float is now in strong hands and an uptrend ensues with the occasional balancing period or correction.
3) Once they’re done with the uptrend, they then distribute (Chain 2, step 1) at the top. This causes a lack of significant, sizable interest which is needed to keep the ship afloat.
Chain 2 (Dumb Money)…
1) Retail/Dumb money accumulates high (Chain 1, step 2) often all at once due to the emotion of the newly advertised high prices which appears to be a big bullish push.
2) Some realize the gig is up quickly and promptly head for the exits causing a sharp move down, setting off a new downtrend.
3) The remainder become bag holders and will gradually exit until their individual pain threshold is hit and they finally begin selling to smart money (Chain 1, step 1).
Rinse N’ Repeat.
All JMHO, but this is how I look at the market at this stage of my learning.
To me thinking there is only one S&D chain is like thinking the markets operate in a vacuum and that they are tamper free and pure.
I feel the better I get at reading the volume based disparities the closer I am to riding the trends on the coattails of smart money. 
Disclaimers:
There are many additional nuances, like deep corrections with no distribution or where a breakaway gap is used to turn weak hands into strong hands, to name a few.
I’m not saying all retail is “dumb money”. There clearly are many smaller traders that know how to read the writing on the wall.
