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30-Aug-2006
Victor Niederhoffer on the Markets Last Week

S&P futures were down four out of the 5 days, but just 10 points in total after a rise of 1.5 points on Friday. The changes were so small that on 3 of the 5 days, Tuesday, Thursday, and Friday, the change in the the spot index was in the opposite direction to the futures.

Futures so far have been above and below the 1300 level on 7 consecutive days.

           ______________S&P______________         Bond Close
 Date      open     hi      lo     close           (in 32nds)
 8/21      1302.7  1303.3  1298.5  1302.3            109.25
 8/22      1300.0  1305.5  1297.2  1302.0            109.28
 8/23      1301.5  1304.2  1291.7  1297.8            109.28
 8/24      1299.2  1300.5  1293.6  1296.1            110.00
 8/25      1296.2  1301.7  1294.8  1297.6            110.04

It was a very narrow week with an average daily range of 8, and only 1 day (Wednesday) with a 2 digit range of 12. Bonds set new highs every day and at 110 and 4/32 are now at a 5 month high. The relationship between bonds and stocks is always changing, but on average the numbers of one are predictive of the other.

Within the S&P, the best performing indexes were natural resource orientated, with gold, oil, gas and forest products up 3% or more. The 5th best performing group of all, up at 3%, was residential REITs. The worst performing groups, down 5% or more, were general merchandising, specialty stores, home furnishings, home improvements, and specialty construction services (down 8%).

Gold, crude oil and the dollar also made very narrow moves, each ending up about 1 % on the week. The NASDAQ was down almost 2% after rising the previous week by 6%. The VIX was at 12.3%, near the average of last 2 years but below the Spring '06 level, and most levels in the four years prior to that. The rise in bonds corresponds to the decline in soybeans, down to a 16 month low at 557 for November contracts, with comparable declines in other grains (except for wheat at 400 -- about unchanged over the past 3 months).

The backdrop provided by these markets brings to mind the importance of observing a framework, one that can provide a rudder for appreciating what has happened and planning and forecasting for the future. I have always emphasized that often news is backward looking and misleading having the effect of making you think and do the wrong thing so that you can contribute to the continuation of the market ecosystem. The agenda that you choose to review or be influenced by is key to your success.

As an amusing exemplar of this, I have always said that the only news I read is that of the National Enquirer. While that's not true anymore under the new management, since it is very weak on what the common person is doing and rags to riches stories, but now is mainly about the stars and television programs, I do pay much more attention to markets than to purveyors of the news.

I strive to let the agenda and forum that I follow be one that will not lead me down the primrose path to likely destruction. I constantly review this backdrop to help me set my agenda and create a framework for success. What you let yourself be influenced by is the key.

Along these lines, I recently found myself subscribing to a forum that was constantly emphasizing the negatives and the pessimistic approach to the markets . . . to be continued.