Exciting doesn't do it justice

Notice how every time we approach the end of the quarter, all hell breaks loose.

It's the manifestation of hedge funds and their investment behaviors at the end of the quarter:
1. Their profits are determined at quarter end
2. They place their bets before the end of the quarter (within a few weeks of quarter end, a company's business conditions can be relatively well sized up, especially if you spend time collecting insider info)

Another factor is lack of liquidity. Hedge funds thrive on leverage: they borrow form banks and investment banks. Lately, these financial entities are cash strapped, which means that funds are cash strapped.

Lastly, we have a commodity bubble blowing up starting in July. Copper, gold, oil - they went south. Quite a few funds were caught out and have had to sell to raise cash.

In essence, quarter end is setting off alarms and the funds are panicking as they struggle to meet deadlines. As if to prove the point, notice how the Fed's efforts to add liquidity to the market are sparking rallies. It's removing pressure on banks to preserve cash.

As frayed nerves are soothed by the Fed's ready cash, we will see a bounce. But it will be a short lived rally. Quarterly earnings are coming in. The markets will welcome anything short of negative growth, but mediocre growth will be the message.

My prediction:
A rally that will be boosted by options expiration tomorrow.
Then the markets will see-saw back and forth between elation that the government is in control and the reality that the economy is getting worse.
Capitulation by December as layoffs spread and companies can no longer hide the global recession (and seek to take the tax write-offs in 2008).

Meanwhile, it's also clear that the Fed and the Treasury are going to set up a japan-like entity to swallow the bad debt. That means that the time is definitely coming to buy financials.

I would like to add more QID in the rally coming up. Also, if I'm right and we are about to enter another trading channel, it's wise to not hold positions very long. We will probably bounce between 10,600 and 11,100 starting October. Similar to the 11,200~11,600 channel we just left.