After an extremely slow Thursday trade, as the market waits on Friday’s Jobs data, I bring you a follow up on Wednesday’s ISM report. As I wrote yesterday it was very odd indeed. Analyst David Rosenberg agrees, pinpointing what I also thought was quite curious: regional data simply did NOT even come close to reporting what the ISM did.

STRANGE ISM NUMBER … DOESN’T PASS “SNIFF TEST” Here’s why:

1 Most of the regional reports were very poor in August. Either they collectively all wrong or the ISM is.

2 The share of respondents saying the experienced “growth” was 61%, the exact same as a year ago when the ISM was sitting at 52.8.

3 The ISM gain was led by employment (58.6 to 60.4 - best since December 1983) in the same month that ADP manufacturing fell 6,000 (second decline in a row - it was -11k in July when ISM employment was 58.6, so clearly the latter is proving to be, at least for now, an unreliable labour market barometer). Production also ticked up to 59.9 from 57.0 and inventories rose to 51.4 from 50.2. These are all coincident indicators, as an aside (but an important aside).

4 According to the ISM, 76% of the manufacturers surveyed said that their customer inventory levels were either “too high” or “about right”. At the turn of the year, just ahead of the big inventory swing that bolstered the GDP data, this metric was sitting at 60%. As a result, it would be folly to assume that the inventory and production categories will contribute to further ISM increases in the near- and intermediate-term. Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn’t voluntary then we have a huge issue on our hands.”

5 Meanwhile, the more forward-looking components dropped, though were hardly a disaster. But orders slipped for the third month in a row, to 53.1 from 53.5 in July, 58.5 in June and

65.7 in both April and May. That is still a sharp squeeze in the growth rate of capital goods-related order books. At 53.1, ISM orders index is down to levels last seen in June 2009 (but when they were rising in “green shooty” fashion).

6 Backlogs were down as well, to 51.5 from 54.5 in July, 57.0 in June and 59.5 in May (and peaked in February at 61.0). At 51.5, order backlogs stand at their low-water mark of the year.

7 Supplier deliveries (measure of production bottlenecks) eased for the fifth month in a row — to 56.6 from 58.3 in July and well off the March peak of 64.9.

8 Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.

9 Export orders dipped to 55.5 from 56.5 — the lowest they have been since last December. If the overseas economy is rocking and rolling, then why on earth would this component be declining? Not only that, but it looks as though yet again, a good part of the inventory boost we still seem to be getting is being filled by imports — that sub-index jumped four points in August and does not bode well for the trade deficit, which subtracted 3.4 percentage points from headline GDP growth in Q2.

In a nutshell, ISM did smash consensus expectations in August but the composition left much to be desired. The coincident indicators firmed but the categories that actually lead manufacturing activity softened across the board.

As we said at the outset, the ISM index was at complete odds with the regional surveys. Philadelphia, New York, Milwaukee, Richmond and Kansas City were all down. Dallas and Cincinnati were up. In the past, when we had a 5-to-2 ratio to the downside, the share of the time ISM managed to eke out an advance was 4%.

It would be wise to lean against the market’s initial dramatic reaction to this data. The ISM orders/inventories ratio is a decent leading indicator and it sank to 1.033x from 1.065 in July. 1.278x in Julne and 1.441x in May. The hidden nugget in today’s report is that this ratio has decline to levels not seen since February 2009. And the last time it fell this fast to this type of level was in the September to December 2007 period (1.03x from 1.30x) when once again, there was tremendous confusion and intense debate over whether it was a recession/soft patch in the economy and the bear market/corrective phase in equities.

Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today’s data was likely a huge headfake.

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Was Wednesday’s massive rally real, or is the market suffering from psychosis? Was there news that warranted such a move? What about the volume? Is anything real anymore?

1. Wednesday’s volume was lethargic. The NYSE consolidated volume was just 1.19 billion, which is barely better than the 10-day average and LOWER than Tuesday’s. One should expect massive volume - much greater than the 10-day average - to support such a wild price swing.

2. ADP jobs data came out before the open and was worse than expected, showing job losses are increasing.

3. Construction spending was atrocious, coming in far worse than expected.

4. Auto sales were worse than expected.

5. The “savior” was the ISM manufacturing report that came in at a reading of 56.3 when the market was expecting 53.0. Bloomberg, however, didn’t pump up the details like I expected…”Lagging factors gave what is a bit of a deceptive boost to the ISM’s manufacturing index masking a further slowing in the key leading index of new orders…But this growth is in general business activity: production, employment, inventories. These three factors all accelerated in August with a special note on inventories where the gain may reflect in part an unwanted build. New orders slowed but just a bit, down four tenths to 53.1 for its lowest reading since the manufacturing recovery began in the second quarter of last year. Unfilled orders also slowed, down three points to 51.5 and its weakest reading since December. The slowing in order build is certain to limit future improvement in business activity.”

6. One should also question if the ISM will be revised lower. After all, the recent regional (Philly, NY, Chicago) manufacturing and general business activity reports have not been good at all.

7. How strong is a low volume rally that, once it rallies for a mere 20-minutes, goes into a ridiculously narrow hibernation range of just 4.50 points. When the initial knee jerk reaction to the “phenomenal” ISM data subsided, the market barely moved over the next 5+ HOURS.

8. So was Wednesday’s rally real or did a bout of psychosis take over the market?

Before you answer #8 consider the rampant amount of ninety percent days the market has been experiencing. Since late April (the high) the market has had 89 trading days. Of those 89 days, 14 were panic selling days (90% down day) and 13 were panic buying days (90% up day). This means that nearly one third of all trading days since the high for the year were panic days of either direction, while the 10-year average is less than 7%.

Real of psychotic? Human driven, or robotic (HFT)?

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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As surely you have heard on many financial stations, August’s volume has been abysmal. Day after day the lack of volume kept the needed volatility at bay resulting in the choppiest (non-trending) month we have ever recorded. Eighty six percent of all trading days in August were classified as #4 days…not good. And when there was a slight amount of volatility on a given day, it would end as fast as it started and begin the next excruciatingly long sideways (and narrow) move. Goodbye August!

The market continues to desperately support the S&P 1040.00 level as well as Dow 10,000 despite the poor economic news. Today was no different.

Three reports that were said to be very bullish this morning were the Case-Shiller HPI, the Chicago PMI, and the Consumer Confidence reports. Of course, this is more propaganda.

The S&P/Case-Shiller index of property values increased 4.2% from June of last year. However, what I did not see reported anywhere was the fact that this report is two months in arrears, which means that today’s report was still influenced by the free government-giveaway-housing-cheese. It simply does not reflect the current state of affairs.

The Chicago PMI was also bad - it was lower than expected and the worst reading of 2010. With that, the market rallied.

Consumer Confidence was also horrible, but slightly better than expected. At a reading of 53.5 it is still massive below the 5-year average of 76.5, which is where it should be IF the economy was truly recovering…but is not.

No matter - support was held again and the robots bought insane amounts of futures at the close to keep everyone happy at month’s end.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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In my last report I wrote…”The market went crazy with glee last Friday when it found out that the GDP report was close to the expectations. For a change the inept economists that supply Fraud Street with its expectations did not embarrass themselves. The report showed growth two-tenths better than expected.

“Unlike inflationary data, the GDP data is annualized to make it sound more palatable than it really is, just like inflationary data is reported on a monthly basis to keep it from sounding catastrophic if one or more months showed a surge in prices. To be sure, few would be excited over the true monthly GDP growth, which is just .00133%. Uh huh, real exciting!” It would seem Mr. Market read this blog and indeed realized that .00133% monthly growth is nothing to get excited about. The S&P futures nearly gave back 100% of Friday’s gains.

Although the market did “eventually” drop a lot, the day’s most prominent feature was its lack of volume. Monday was one of the lowest NYSE volume days of the year. A large portion of today’s losses were given up late in the day and absent of economic reports one would wonder if there was another reason of the late drop. A rumor perhaps?

I receive daily emails from a company called STRATFOR Global Intelligence that may have led to the late drop. In today’s widely read report STRATFOR says…

China: Rumors of the Central Bank Chief’s Defection

Rumors have circulated in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country. The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou. Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China.

STRATFOR has received no confirmation of the rumor, and reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment. However, the release of this rumor and its dispersion throughout the public is significant, particularly as the Communist Party of China (CPC) is preparing for a leadership transition in 2012.

Read more here

Perhaps that’s all it took to send the market lower late in the day? Why not? Rumors work quite well on the long side so I would suppose that once in a while the reverse would be true.

This sort of thing probably wouldn’t have much traction Tuesday; there is a good amount of data coming forth as well as FOMC minutes.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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The market went crazy with glee last Friday when it found out that the GDP report was close to the expectations. For a change the inept economists that supply Fraud Street with its expectations did not embarrass themselves. The report showed growth two-tenths better that expected.

Unlike inflationary data, the GDP data is annualized to make it sound more palatable than it really is, just like inflationary data is reported on a monthly basis to keep it from sounding catastrophic if one or more months showed a surge in prices. To be sure, few would be excited over the true monthly GDP growth, which is just .00133%. Uh huh, real exciting!

Below we read another quick update on the GDP data from analyst Dave Rosenberg of Gluskin Sheff & Associates.

REVISIONISTS UNITE!

Like the equity analysts, the economists are now in the process of cutting their GDP forecasts — but in dribs and drabs, and nothing very draconian just yet. It is interesting to see that the hopes of a 3%-plus growth for this quarter have been marked down to 2.5% in just three short months and frankly, it looks like the economy may even be contracting right now. The consensus has only now begun to touch Q4, and there is probably much more work to do on this score as well.

The bright light in the Q2 revision was the uptick to consumer spending, to a 2% annual rate from 1.6%, while at the same time we had the inventory line revised lower to a $63.2 billion build from $75.7 billion. This configuration is alleviating concerns that a move to take inventories down in the third quarter will be necessary since household spending held up better than earlier expected.

Real GDP in the U.S. came in higher than expected, coming in at 1.6% versus market expectations of 1.4% in Q2. Boy oh boy, 1.6% never felt so good. Be that as it may, much of the upward revision on consumer spending was in services and non-durables, and it looks to be energy related (gas, electricity). In real terms, consumption of gasoline/other energy goods rose at a 4.7% annual rate whereas in the previous “take” on Q2 GDP it was reported to be up only at a 0.7% annual rate. Spending on utilities also swung from what was reported before as a 0.7% decline to a 1.5% increase. Strip out the energy components, and consumer spending did not improve at all from the last Q2 report we were issued a month ago. In other words, if not for the fact that more of the household budget was diverted to the energy bill in Q2, consumer spending would have shown a 1.6% growth rate and GDP would have actually come in BELOW consensus, at +1.3%. Notably, consumer spending on big-ticket durable goods came in lower than initially estimated — trimmed to a 6.9% annual rate from 7.5%.

Here’s what is important to take away:

* We had 5% real GDP growth in the fourth quarter of last year, followed by 3.7% in Q1, 1.6% in Q2 and now what looks to be little better than 0% this quarter. So the notion that the economy has hit stall speed has not changed in this report —if anything, it was enhanced.

* Real final sales — GDP excluding inventories — was actually marked down in this report to a meager 1% annual rate. That is really soft and underscores the overall weakness in the demand guts of the economy. We know from the monthly data that much of this paltry 1.6% growth in Q2 was baked into April — four months ago! — and that the pace of activity has weakened markedly ever since.

* The monthly GDP data have actually shown declines for two months running and there is a negative “build in” so far for Q3. There is practically no growth in real consumer spending heading into the current quarter and we know that back-to-school sales so far have been sluggish.

One more comment on Q2 — just to put 1.6% into context. Historically, four quarters following a bottom in GDP, growth is running over a 6% annual rate. Rejoicing over 1.6% because it wasn’t 1.4%, particularly in the context of the most radical bailout, monetary and fiscal stimulus in U.S. history, totally misses the point that we are operating in a totally abnormal and fragile economic environment.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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I have already given the details of the two recent housing reports; however, today I’d like to give you “Rosie’s” perspective today. Breakfast with Dave is always a good read.

Burning Down the House

Once again, the consensus was fooled. It was looking for 330k on new home sales for July and instead they sank to a record low of 276k units at an annual rate. And, just to add insult to injury, June was revised down, to 315k from 330k. Just as resales undercut the 2009 depressed low by 15%, new home sales have done so by 19%. Imagine that even with mortgage rates down 100 basis points in the past year to historic lows, not to mention at least eight different government programs to spur homeownership, home sales have undercut the recession lows by double-digits.

In the aftermath of a credit bubble burst and a massive asset deflation, trauma has set in. The rupture to confidence and spending from our central bankers’ and policymakers’ willingness to allow the prior credit cycle to go parabolic has come at a heavy price in terms of future economic performance. Attitudes towards discretionary spending, credit and housing have been altered, likely for a generation.

The scars have apparently not healed from the horrific experience with defaults, delinquencies and deleveraging of the past two years — talk about a horror flick in 3D. The number of unsold homes on the market exceeds four million and that does include the shadow bank inventory, which jumped 12% alone in August, according to the venerable housing analyst Ivy Zelman.

Nearly 1 in 4 of the population with a mortgage are “upside down” and as a result are now prisoners in their own home. We have over five million homeowners now either in the foreclosure process or seriously delinquent. The government’s HAMP program was supposed to bail out between 3 and 4 million distressed homeowners and instead we have only had a success rate of fewer than half a million.

Now back to the new home sales data. Every region in the U.S. was down, and down sharply. The homebuilders did not cut their inventory levels and as a result, the backlog of new homes surged to 9.1 months’ supply from 8.0 months in June, which means more discounting and margin squeeze is coming in the homebuilder space. As it stands, median new home prices were sliced 6% in July and this followed on the heels of a 4.7% drop in June. And, at $235,300, average new home prices are down to levels last seen in March 2003, down nearly 30% from the 2007 peak. If the truth be told, if we are talking about reversing all the bubble appreciation that began a decade ago, then we are talking about another 15% downside from here. The excess inventory data alone tell us that this has a realistic chance of occurring.

See chart here

The high-end market, in particular, is under tremendous pressure. In fact, it is becoming non-existent. Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row. Only 1,000 units priced above 500,000 moved last month. That’s it! Over 80% of the homes that the builders managed to sell were priced for under $300,000. Just another sign of how this remains a full-fledged buyers’ market — at least for the ones that can either afford to put down a downpayment or are creditworthy enough to secure a mortgage loan (keeping in mind that 25% of the household sector does have a sub-600 FICO score).

This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless “quick fix” towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished, either by paying it down or by walking away from it (or having it socialized).

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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Before the second shockingly bad housing report was released today, there was another poor report: durable goods.

Although the durable goods data showed a very modest increase of +0.3%, it was far below what the so-called experts - economists - said it would be. Once again, these experts couldn’t be more inaccurate as they predicted a +3.0% reading. Wrong again boys!

JP Morgan said the following…The July durable goods report was a major disappointment and raises the risk that third quarter GDP growth prints below 1%. Shipments of core capital goods (ex-aircraft and defense) fell 1.5%, the most since April 2009, and orders for core capital goods plunged 8.0%, the most since January 2009. This category is the most important element of the report as it is the best gauge of business capital spending and it feeds into the calculation of GDP. Other aspects of the report weren’t quite as bad: total orders were up 0.3%, which was entirely accounted for by a 76% jump in bookings of civilian aircraft. Total shipments rose a decent 2.2% in July, thanks mostly to an increase in shipments of semiconductors and other electronic intermediate inputs.

Core capital goods tend to be seasonally weak the first month of the quarter, due to excess seasonality in the machinery category. However, even after accounting for that the capital spending implications still look atrocious. In particular, new orders for machinery declined 15%, the most on record going back to 1992. There was a modest upward revision to June core capital goods shipments, which implies that second quarter GDP growth is now tracking 1.2% instead of 1.1%. However, even with that revision core capital goods shipments are tracking a 2% annual rate of decline early in Q3, down sharply from a +18% pace in Q2 and +12% rate in Q1. The downshift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year.

Inventories at manufacturers of durable goods increased $1.8 billion in July, well below the $3.3 billion average increase in stocks over the prior three months–another factor which lends downside risk to Q3 GDP growth.

But the always wrong Wall Street economists weren’t done yet, they missed another one. Economists expected new home sales to be at 330,000, but came in at the WORST ever recorded level of just 276,000. Moreover, the deflation monster took another bite out of assets - homes - as the home price index fell -0.3%. Of course, the economists missed that as well, telling clients to expect a gain 0.1%.

The Census Bureau said the following…

Sales of new single-family houses in July 2010 were at a seasonally adjusted annual rate of 276,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 12.4 percent (±10.8%) below the revised June rate of 315,000 and is 32.4 percent (±8.7%) below the July 2009 estimate of 408,000.

The median sales price of new houses sold in July 2010 was $204,000; the average sales price was $235,300. The seasonally adjusted estimate of new houses for sale at the end of July was 210,000. This represents a supply of 9.1 months at the current sales rate.

Given this news, the manic-depressive market rallied into the close. Yes, it closed HIGHER. Additionally, housing stocks SKYROCKETED today.

Oh sure, there’s no manipulation going on here whatsoever.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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Existing home sales plummeted last month - big time. Housing sales have been in a down trend since the government took away the freebies. Of course that government cheese did nothing but pull forward future demand - demand that would have occurred naturally without government giveaways. I knew it. You knew it. But guess who didn’t know it and probably never will: economists.

You’d have to be as dumb as an economist to think that housing was getting better now and that the government handouts were anything but faux-stimulus. Said another way, you’d have to be as dumb as an economist to think that government giveaways were real economic activity. Moreover, you’d have to be as foolish as a Keynesian devotee to believe that all of the additional debt doesn’t matter.

The program didn’t work, yet we’re saddled with the massive cost of the program…and politicians are dreaming up even more housing giveaway schemes.

Bloomberg said, Sales of U.S. previously owned homes plunged 27 percent in July, twice as much as forecast, evidence foreclosures and limited job growth are depressing the market.

Purchases plummeted to a 3.83 million annual pace, the lowest in a decade on record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. Demand for single-family houses dropped to a 15- year low and the number of homes on the market swelled.

A tax credit of up to $8,000 boosted sales earlier in the year, pulling forward demand and indicating additional advances will prove difficult. Mortgage rates at record lows have provided scant relief to the industry as unemployment hovers close to 10 percent, foreclosures hold near record-highs and the economy cools.

“This is a devastating reading on the U.S. housing market,” said Derek Holt, an economist at Scotia Capital Inc. in Toronto. “There’s such an inventory overhang, it shows there will be pressure on prices” in the months ahead.

The pace of existing home sales is the slowest since comparable records began in 1999. Purchases of single-family homes dropped to a 3.37 million annual rate, the lowest since May 1995.

Range of Forecasts

Economists projected sales would fall 13 percent from June’s previously reported 5.37 million pace. The agents’ group revised the June sales figure down to 5.26 million. Estimates in the Bloomberg survey of 74 economists ranged from 3.96 million to 5.3 million. Previously owned homes make up about 90 percent of the market.

The number of previously owned homes on the market rose 2.5 percent to 3.98 million. At the current sales pace, it would take 12.5 months to sell those houses, the highest since at least 1999 and compared with 8.9 months in June. The months’ supply of single-family homes at 11.9 months was the highest since 1983, the NAR said.

The worse-than-bad news just keeps rolling in, yet the market somehow largely ignores it. This housing report came out after the market opened so it was not the reason why the Dow and S&P500 closed down today. In fact, the market closed only 1.50-points below the level where the ES was trading when the horrific housing data hit the tape. Additionally, the range after the initial drop was as ridiculously narrow as the prior few weeks individual ranges.

Regardless what the lame stream media may say, not only wasn’t the devastating housing news responsible for the lower close, but it also couldn’t even generate a smidgen of volatility.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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Today I bring you a quick piece from “Breakfast With Dave.” Analyst Dave Rosenberg from Gluskin Sheff believes Q3 data will come in with a negative reading and economists saying that the recession never ended.

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008.

The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.

(See chart above right.)

Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting.

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.

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Concentration

Off floor day trading from a computer monitor from a “home” office is particularly challenging and beyond the capability of most. This is part of the reason why over 95% of such traders fail. One of the biggest reasons traders fail is that most people are incapable of maintaining intense concentration for any length of time.

But that’s no reason to give up. Why not?

Because you don’t have to be stuck in front of your monitor every moment of the trading day. Markets develop their own characteristics and their own flow, which hold true most of the time. To be in harmony with the flow of the market is a distinct advantage over those who are not.

Predictable Humans

Most of the time, there are only 2-3 good intra day swings in the E-mini S&P market. The majority of professionals are happy to catch 3-4 really good trades a week. For most traders, trades turn out to be a series of small wins and losses.

Markets are made up of people, flawed human beings. People tend to be creatures of habit. Therefore their actions are predictable. Because of this, it is not difficult to recognize recurring trading patterns. There are several patterns related to the time of day which have been pretty reliable over time.

Intra Day Patterns

The 10 o’clock Reversal

At 10:00 a.m. (EST) there is high probability that the trend of the first half hour will reverse. Frequently there is government or other economic stats released at that time. This often makes price reversal appear to be a cause and effect phenomenon. Many times, even without new news, we see price reversal around that hour.

The Lunch Time Fade or Whipsaw Alley

The morning trend, be it up or down, usually reverses between 11:30 a.m. (EST) and noon hour. Partial retracement usually occurs through the New York lunch hour (or two). This can be a very choppy period, and not a time to initiate new positions as they are frequently whipsawed.

After lunch (usually after 2:00 p.m. (EST)), traders attempt to reestablish the morning trend. If the afternoon reassertion starts too soon it frequently cannot be sustained into the close. If the trend cannot be sustained it tends to die off around 3:00 p.m. (EST) when the bond market closes. If so we often see a sharp reversal after the bond close.

However, if there is an afternoon “shakeout” before the bond close, usually between 2:00-2:30 p.m. (EST), then the market often regroups to re-establish the trend into the close.

The Final Hour

I recommend you do not fade a trend in the last hour of the day. Strong trends into the close favor a better exit price on the opening the next day on the probable follow through. In the final hour of trend days fund managers who may have missed the trend often play catch up. With the anxiety of being seen to have been left behind they join in with almost the same zeal that shorts cover their positions when squeezed.

Additionally, the so called “smart money” usually makes their presence felt by making their move in the final half hour. Their action is usually heralded by a salvo of self-serving program trading. This is followed by continuous reentry on high volume right into the Wall Street close.

TGIF

Many traders prefer to go flat, or even up, before the weekend. Consequently, trends on Friday tend to end at 3:00 p.m. (EST), not 4:00 p.m. (EST). In the summer months, this process occurs around 11:30 a.m. (EST).

Self Imposed Limits Could = Increased Profit Potential

So be encouraged and consider limiting your day trading to those periods when there is the greatest activity and volatility. There is a couple of hours in the middle of the day, most days anyway, that you could consider doing what I know many successful traders do. They use the time to go to the gym, the lap pool, a walk in the park, a meditative retreat, anything that will restore the body and soul and make for a long and profitable life as a day trader.

Trade well and follow the trend, not the so-called “experts.”

Larry Levin trades the S&P 500 at the Chicago Board of Trade, now known as The CME Group; the world’s largest and most diverse financial exchange. Levin is the Founder of Trading Advantage.com, a leading trading education firm specializing in empowering traders to achieve and surpass their financial goals. He appears regularly on CNBC, Fox Business News and other major media outlets worldwide. Contact Larry at 888-755-3846 or larry@tradingadvantage.com

In an effort to comply with all applicable rules and regulations please be so kind and read the disclaimer below:

Risk Disclosure Statement - Past performance is not necessarily indicative of future results. The risk of loss in trading commodity futures contracts can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should be aware of the following points:

(1) You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the time required by your broker, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.

(2) Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market reaches a daily price fluctuation limit (”limit move”).

(3) Placing contingent orders, such as “stop-loss” or “stop-limit” orders, will not necessarily limit your losses to the intended amounts, since market conditions on the exchange where the order is placed may make it impossible to execute such orders.

(4) All futures positions involve risk, and a “spread” position may not be less risky than an outright “long” or “short” position.

(5) The high degree of leverage (gearing) that is often obtainable in futures trading because of the small margin requirements can work against you as well as for you. Leverage (gearing) can lead to large losses as well as gains.

(6) You should consult your broker concerning the nature of the protections available to safeguard funds or property deposited for your account. ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE FOLLOWING ADDITIONAL RISKS:

(7) Foreign futures transactions involve executing and clearing trades on a foreign exchange. This is the case even if the foreign exchange is formally “linked” to a domestic exchange, whereby a trade executed on one exchange liquidates or establishes a position on the other exchange. No domestic organization regulates the activities of a foreign exchange, including the execution, delivery, and clearing of transactions on such an exchange, and no domestic regulator has the power to compel enforcement of the rules of the foreign exchange or the laws of the foreign country. Moreover, such laws or regulations will vary depending on the foreign country in which the transaction occurs. For these reasons, customers who trade on foreign exchanges may not be afforded certain of the protections which apply to domestic transactions, including the right to use domestic alternative dispute resolution procedures. In particular, funds received from customers to margin foreign futures transactions may not be provided the same protections as funds received to margin futures transactions on domestic exchanges. Before you trade, you should familiarize yourself with the foreign rules which will apply to your particular transaction.

(8) Finally, you should be aware that the price of any foreign futures or option contract and, therefore, the potential profit and loss resulting there from, may be affected by any fluctuation in the foreign exchange rate between the time the order is placed and the foreign futures contract is liquidated or the foreign option contract is liquidated or exercised. THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS

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