Market Indicators: The Best-Kept Secret to More Effective Trading and Investing

Chapter 2. Big Money on the Move

	Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.
	--—PHILIP ROTH, investor

	Never short a dull market.
	--—WALL STREET maxim

The options market usefully reflects investors' perception of future volatility. But it's also important to look at how stock prices are acting. Is the market calm or turbulent? And what does the current price action reflect?

Before approaching that question, a review of major market participants is in order. Hedge funds nominally controlled almost 1.9 trillion in assets at the end of 2008. These funds generally are graded on a monthly basis and expected to make money most every month while maintaining low volatility: a tall order in a crowded field of very smart, motivated money managers. Hedge funds can move individual stocks and sectors, with a trading style that moves money in and out of positions very quickly.

As a group, pension funds, insurance companies, mutual funds, and sovereign wealth funds contain much more money than do hedge funds, and their influence is much greater and longer lasting. Globally, there was over $60 trillion managed by private institutional investors at the end of 2006. Institutional money can move individual stocks and sectors; it can also move entire markets and indexes, including the $9.6 trillion Wilshire 5000 (as of December 31, 2008), the broadest U.S. market index. We might think ...