Less Dumb Money

The trading is getting harder.  There is a feast and famine cycle to trading.  Usually after a feast in a market, it turns to famine.  For ES traders, July 2007 to March 2009 was the feast.  Now is the famine.  The volatility has gone straight downhill.  To these eyes, the moves are harder to predict.  The markets don't go down as much when getting oversold, and don't go up as much when getting overbought.  The dumb money has been wrung out of this market by the volatile trading in 2008.  Those that chased moves in the fall of 2008 got killed.  Mean reverting moves dominated from mid October 2008 to the end of the 2008.  The chasers got crushed during that time and were likely wiped out.  The volatility was extraordinary, and trading volumes went through the roof.  There were big winners and big losers.  The mean reversion traders took down big profits, but probably gave back a chunk of that this year, which has been trendy.

The stock market is like a poker room, eventually the money goes to the best players.  But the house takes a very significant chunk of the money in play.  Therefore, you will have more losers than winners.  The losers eventually go broke.  Unless you get a new supply of bad players, the games get tougher.  Well, we have destroyed a lot of losers in 2008.  New losers will come back to replace the old ones, and some of the old losers will come back after building another stake.  But the losers will be slow to come in because of the bad economy. 

Right now, the game has an unusually high percentage of past winners battling out against each other.  That has made the game tougher.  The trading is more disciplined.  The losers that were there to sell after the markets got very oversold, or buy after the markets got very overbought are history.  That helps explain some of the lessening day to day volatility.  And the lower volumes.