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by Al Martin

How To Make Money on Market Volatility

(10-20-14) There has been record market volatility this past week, the total range of volatility being 747 points in the Dow. This has created tremendous trading opportunities and it was an easy week to trade, particularly for the shorts like myself. All you had to do is keep shorting the December Spoos every time they got back up into the 1880s or so.

      As Investopedia explains, Spoo is “a slang term for an S&P; 500 contract that trades on the Chicago Mercantile Exchange (CME)… It comes from the symbol for the September contract: ‘SPU’… Trading a Spoo is a bet on where the S&P; 500 index will be at some point in the future…”

      In other words, we’re still trapped in range-bound trading which is the enemy of the CLPs (Colored Light People, a/k/a unsophisticated traders who rely on financial media shills or cockamamie charts and graph advisory services).

      This coming week will be another week of increased volatility because there will be a lot of quarterly corporate earnings reports coming out. You will also see a continued deterioration in global economic statistics that we have seen all through this month of October. Also I am certain there will be another test of the 1815 area of the Spoos. We’ve learned that every time the December Spoos get above 1890 it’s what is called a “gift short.” This occurred twice last week. This is the gift that keeps on giving.

      So what are the key reasons for this volatility? The reason is that the Unwashed, who have been on the sideline for a long time and who know that traditionally October is the second worse month of the year, have always been taught to buy the October dips. That’s what the Unwashed in general have been taught. You can tell by the volume, which is large “odd-lot” volume, meaning transactions of less than a 1000 shares on the buy side. You can see that it’s the public that keeps buying every time the markets rally. Then they get stopped out at every decline like they’ve been stopped out every day last week. They keep buying the rallies because that’s what they’ve been told to do. They’ve been told that lows are traditionally reached in October, but of course the public i.e. the Great Unwashed, never buys the dips, they buy the rallies.

      What you also see all month long is a lack of conviction by the buyers because every day at 5 o’clock when the Spoo (S&P; 500) futures close, they’ve closed at a deep discount to where the cash index closes. This shows a lack of conviction in the buyers. My own opinion – and what the tapes are telling you -- there is not this large pool of sidelined Joe Six Pack money just waiting to come into the markets.

      It’s a case of people still being frightened. The financial media shills say – oh, they’re dipping their toe back in the water. The so-called sidelined cash gets measured is by looking at total assets and money market mutual funds aggregate. The problem is that personal savings rate which had been a red number did finally start to get back to a more normal for now 4%. Back in the 1950s, it should be remembered that the savings rate was 11%. We have seen consistent decline in what’s call the “personal savings rate” which is simply the amount of money people keep in banks. You also see a consistent decline in so-called sidelined cash, money that people keep in money market accounts. I think what’s happening is that the money is being depleted and that people are simply using it to live off of.

      Even though there is a decrease in the rate of unemployment, wages are flat, i.e. wages aren’t growing whilst at the same time costs are growing. Also you still see this tremendous amount of underemployment. That rate remains consistently in the double digits. Net per capita income is going to fall again this year for the third year in a row. That’s why I think the savings that the shills talk about are being depleted and there is not this tremendous pool of sidelined money available to come into the equity markets.

      What we have seen throughout last week is an enormous amount of hedge fund selling and that’s what has really created the dips. Why? Because the hedge funds were too long and this created a drop in liquidity throughout the planet and that’s how you could tell how nervous the government was this week, when US Treasury Secretary Jack Lew actually asked Morgan Stanley and Goldman Sachs that if the S&Ps; came under 1800 would they please cover their shorts to provide market support. It’s very unusual for a Treasury Secretary to make that kind of comment publicly.

      The inference is that governments are frightened. You saw similar comments out of Mark Carney from the Bank of England when he said the Bank of England would stop lending to hedge funds that were long anything. What governments did effectively was to force hedge funds out of overly long positions. In other words they were too long and they were frightened of creating another debacle a la 2008. That would severely wound the nascent pick-up in GDP which has occurred in the last 5 years.

      Meanwhile Bloomberg reports – “In the second half of 2008, energy and raw-material stocks led the 29 percent plunge in the S&P; 500. Both groups sank more than 40 percent and financials were in third place among the 10 big groups with a 38 percent drop.”

      It’s the same thing now – energy and commodity related stocks are leading the market lower because commodity prices are falling just as they did in the second half of 2008.

      Also there was a big crack in the Oil in the second half of 2008 just as the Oil is getting cracked again. The difference however is the present inability of the Oil to rally back because supply/ demand factors just keep going one way all the time – and probably will for years to come. In other words, every year there is more supply and every year there is less demand and that’s unlikely to change for many years in the future.

      Accordingly Oil, despite what the Oil shills say on CNBC which is – don’t worry because they can increase the price by reducing production and then push out marginal producers which they employed successfully in 1980 and then again in 1986 when they let Oil run down to $10. However today Saudi Arabia who is the key producer and has the ability to manipulate prices more than anybody else is now in such a fiscally deteriorated position doesn’t have that option any more which is pound the Oil down to get rid of the competition which is what they’ve done in the past. Furthermore because of the record surface supply of both crude and refined Oil, any effort to take Oil off of the market means that this would not work out. In fact I think the Oil companies would be relieved to get rid of this record supply of Oil that the planet is still swimming in.

      And how is this going to impact the fracking boom? Will it just die on the vine? The argument about fracking is that they need about $74 a barrel to make money and that’s the line that’s getting pushed. So if the Saudis are able to pound down the price to $70 you’ll see fracking get taken out of the market. However even so any fracking coming out of the market would only be a temporary factor. In other words -- how much of a loss would that represent because the companies that are involved in fracking are the same Oil companies that have these enormous inventories of crude product that they haven’t been able to sell?

      The incentivized write-offs that Oil companies get with fracking and the tax write-offs that made fracking possible are going to remain at least until the US becomes energy self-sufficient because it is such a tempting political goal that the tax benefits will remain. Now people in Washington know that it is possible for something that they never thought would be possible, that the destruction caused by the Kissinger policy of recycling petro-dollars could be reversed and for the United States to become self-sufficient in hydro-carbon energy again. That is now possible.

      So what’s the plan? Just keep shorting the rallies and the commodities are going to keep going lower for now…

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," ( provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" ( will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.


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