The numbers are incredible. Goldman Sachs just revealed in an SEC filing that its traders made money on every single
trading day last quarter, a record for the firm. Net revenue for
trading was $25 million or higher in all of the first quarter’s 63
trading days with 35 of those days bringing in more $100 million.
Even if you had a 95% likelihood of a winning day, you would have
only a 3.9% chance of doing it 63 trading sessions in a row.
Does a Perfect Trading Quarter Score One for the Rigged-Market Theory?
Whatever the cause of the perfect quarter, it comes as part of a
pattern. Goldman Sachs only recorded 11 loss days in the prior 12 months. So while some luck is
involved in stringing together a perfect Quarter, the trend of success does not seem to be a fluke.
When the government is on a mission, you may not like the policies … but as an investor, you fight it at your peril. More simply put, don't fight the Fed.
Enticing the Crowd Back to the Markets With "You Can't Win If You Don't Play".
After the "flash crash", the markets recovered quickly and then sold off again, ending that week with additional selling pressure. While some people might have seen that volatile move down as a buying opportunity, many others saw it as a place to get short (or at least to take some risk off the table).
The result was heavier shorts and lighter longs going into the beginning of last week.
For those of you that believe in the "Plunge Protection Team" (which isn't quite the same as believing in the Tooth Fairy), then it probably wasn't surprising to find the markets gapping higher to start trading last Monday. Nonetheless, you might have been surprised to find that the gap was close to 4%.
It All Depends on How You Look At It.
Once again, different types of traders will interpret that as a threat or an opportunity.
The Bear: Some consider "expecting gaps to close" to be a high probability trading setup. Consequently, a big gap-up offers an opportunity to enter a short position with a well defined stop. Add the increased volatility, and the bears were frothing at the mouth.
The Bull: This type of trader would notice that a 4% gap is very different than a half percent (or a even a one percent) gap. Consequently, they expect massive short covering from all the bears trapped in their short positions from the week before. Therefore, they are looking to buy the gap (instead of shorting it).
Imagine the arguments at trading desks around the world as they try to figure out whether this pattern was part of a market top or the sign of a continuation rally.
Obviously, the markets continued higher. This forced more shorts to
cover, and also disturbed traders who wanted to buy, but didn't because
of risk concerns.
The Skeptic: That brings up a third type of trader, someone who was sitting on cash because their trading systems work well during normal market conditions (but who suspects that these are not normal market conditions because of the volatility and exogenous threats).
So, Wednesday comes and it is clear that the markets have been trending higher. Now imagine the conversations at the trading desks of the people who are sitting-out these big swings. They are getting pressure from their bosses and their clients to ask why they are missing these "easy" trades.
It's easy to go to cash, but when do you get back in? How do you determine when it's safe to get back in the water?
Is It Safe?
And there are signs that something "different" is happening. Here is a video from Jason Leavitt.
Learned
Behavior.
Many of the algorithmic firms got burned
during the last period of unusual volatility. They have the benefit of
sophisticated back testing and analysis tools. You'd expect them to
develop new rules to reduce their exposure, or at least a switch which
systems are using in the markets. So their behavior shouldn't be surprising.
Pick Your Poison.
Going back to the folks who believe in the Plunge Protection Team, as I've discussed before, it makes sense for the government to move the markets higher during periods of light trading. It accomplishes their goal with the least cost.
Because it's supposedly a free market, if people disagree with higher prices … it will trigger selling. At this point, it appears that we are getting close to the area that will trigger selling. Moreover, I don't think it is in the government's interest to prevent that from happening. Nonetheless, there is a lot of backstage maneuvering going on right now to prevent heavy selling.
So traders now have a different decision in front of them. On one hand, they know it isn't often profitable to fight the Fed. On the other hand, in the long run, it's even harder to fight human nature. Markets can be pushed a little this way or that; but for how long?
And our government isn't the only one facing tough choices.
Greece Is The Word, At Least For A Little Longer … Then It Might Be PIIGS.
Paul
Kedrosky posted a chart showing that this time is different.
Behold the immensity and the singularity of Greece’s sovereign debt
& fiscal adjustments.
As the Atlantic
points out, it's not just the case that these countries are running
huge deficits. It's also worrying that they owe each other tens of
billions of dollars. Greece owes $10 billion to Portugal. Portugal owes
$86 billion to Spain. Spain owes more than $200 billion to both France
and Germany. If Greece defaults, it's not clear where the domino effect
stops.
Enticing the Crowd Back to the Markets With "You Can't Win If You Don't Play".
After the "flash crash", the markets recovered quickly and then sold off again, ending that week with additional selling pressure. While some people might have seen that volatile move down as a buying opportunity, many others saw it as a place to get short (or at least to take some risk off the table).
The result was heavier shorts and lighter longs going into the beginning of last week.
For those of you that believe in the "Plunge Protection Team" (which isn't quite the same as believing in the Tooth Fairy), then it probably wasn't surprising to find the markets gapping higher to start trading last Monday. Nonetheless, you might have been surprised to find that the gap was close to 4%.
It All Depends on How You Look At It.
Once again, different types of traders will interpret that as a threat or an opportunity.
The Bear: Some consider "expecting gaps to close" to be a high probability trading setup. Consequently, a big gap-up offers an opportunity to enter a short position with a well defined stop. Add the increased volatility, and the bears were frothing at the mouth.
The Bull: This type of trader would notice that a 4% gap is very different than a half percent (or a even a one percent) gap. Consequently, they expect massive short covering from all the bears trapped in their short positions from the week before. Therefore, they are looking to buy the gap (instead of shorting it).
Imagine the arguments at trading desks around the world as they try to figure out whether this pattern was part of a market top or the sign of a continuation rally.
Obviously, the markets continued higher. This forced more shorts to
cover, and also disturbed traders who wanted to buy, but didn't because
of risk concerns.
The Skeptic: That brings up a third type of trader, someone who was sitting on cash because their trading systems work well during normal market conditions (but who suspects that these are not normal market conditions because of the volatility and exogenous threats).
So, Wednesday comes and it is clear that the markets have been trending higher. Now imagine the conversations at the trading desks of the people who are sitting-out these big swings. They are getting pressure from their bosses and their clients to ask why they are missing these "easy" trades.
It's easy to go to cash, but when do you get back in? How do you determine when it's safe to get back in the water?
Is It Safe?
And there are signs that something "different" is happening. Here is a video from Jason Leavitt.
Learned
Behavior.
Many of the algorithmic firms got burned
during the last period of unusual volatility. They have the benefit of
sophisticated back testing and analysis tools. You'd expect them to
develop new rules to reduce their exposure, or at least a switch which
systems are using in the markets. So their behavior shouldn't be surprising.
Pick Your Poison.
Going back to the folks who believe in the Plunge Protection Team, as I've discussed before, it makes sense for the government to move the markets higher during periods of light trading. It accomplishes their goal with the least cost.
Because it's supposedly a free market, if people disagree with higher prices … it will trigger selling. At this point, it appears that we are getting close to the area that will trigger selling. Moreover, I don't think it is in the government's interest to prevent that from happening. Nonetheless, there is a lot of backstage maneuvering going on right now to prevent heavy selling.
So traders now have a different decision in front of them. On one hand, they know it isn't often profitable to fight the Fed. On the other hand, in the long run, it's even harder to fight human nature. Markets can be pushed a little this way or that; but for how long?
And our government isn't the only one facing tough choices.
Greece Is The Word, At Least For A Little Longer … Then It Might Be PIIGS.
Paul
Kedrosky posted a chart showing that this time is different.
Behold the immensity and the singularity of Greece’s sovereign debt
& fiscal adjustments.
As the Atlantic
points out, it's not just the case that these countries are running
huge deficits. It's also worrying that they owe each other tens of
billions of dollars. Greece owes $10 billion to Portugal. Portugal owes
$86 billion to Spain. Spain owes more than $200 billion to both France
and Germany. If Greece defaults, it's not clear where the domino effect
stops.
Have you heard the commentators trying to explain Thursday's massive move down in the markets by blaming computer trading, a trader's error, or the news about what's happening in Greece?
I don't believe that any of those explanations are the "cause" of the melt-down.
There's a difference between things that happen near the same time, and things that cause other things to happen. In statistics this is the difference between a coincident and a causal indicator.
An Unlikely Explanation.
Even if some trader accidentally tried to sell a billion shares of Procter & Gamble rather than 1 million shares … Do you really believe a broker's or exchange's risk-management protections would allow a billion share order (sure, an error … but not that error)? Or, do you really believe that a "fat-fingered" sale in America would cause Asia's market to go down 8%?
Think about how many market participants there are around the world. Free market buying and selling is supposed to take care of mispriced assets. If
something is too high, then people won't buy it. When something's too
low, speculators swoop in to grab the bargain.
A More Likely Scenario.
The real story is that people are scared. And unlike the recent rally, the move down was met with selling rather than buying.
There's an old trading adage that says markets climb a wall-of-worry one step at a time, then fall off the roof. In a normal up-trend, chances are you'll just hold what you own; because you have no real incentive to take action. Consequently, as recent policies and actions pushed the markets higher, many market participants simply smiled and felt good about their good fortune.
However, it doesn't work the same way when markets go down. In order to protect your profits, or avoid losses, it is important to take risk off the table. As more people start doing that, prices start to move faster, which feeds the fire … and finds even more sellers. As a result, there actually is an incentive to take massive action.
But Don't You Have to Blame Someone?
One of the interesting arguments that I've heard recently is that the crash was caused as high-frequency trading firms stopped trading in the market. In other words, the lack of liquidity caused these massive price moves.
To me, it makes sense that high-frequency trading (or other algorithmic trading systems) stopped trading during times of market turmoil. One of the primary lessons from last year's bear market is to recognize that certain systems are designed only for normal market periods.
As price and volatility move outside normal levels, we now tighten our risk and cash management parameters. Once we got past those limits, we stopped trading. Why? Because of the massive pain inflicted by not doing that the last time we saw those types of price moves and volatility.
Likewise, I suspect it's the same for many other systems traders. Each of them went through a process of figuring out what works, and what doesn't work, during different market conditions. It makes sense that they learned to trade less when they don't have an edge.
Consequently, the patterns of price movement and liquidity changed during the big move down.
Let the Investigations Begin.
Trying to figure-out what caused people to be afraid is silly. Fear
cause people to be afraid. Human nature weighs the fight or flight
instinct … and often chooses flight during dangerous situations.
And if people are trying to sell, but no one is buying, then price
will continue to fall until it's low enough that people feel they're
getting a bargain again.
On a side note, if a trader puts in a limit order to buy an asset if
gets down to a certain price (let's say $0.01 for a share of Accenture)
and there is no other buyer to fill a "market order", then crazy as it
sounds, that is what happens.
Will More Regulation Help Here?
I see both sides. On one hand, I am surprised that the Specialists weren't there to back-stop the market and take more sales at falling (yet, realistic) prices. Perhaps that merits some scrutiny?
On the other hand, in a free market environment, do you really believe that it is in our best interests for the governments and the exchanges to figure-out how to prevent markets from going down?
When the NYSE started to enforce trading curbs and slowdowns, sophisticated investors started off-loading some of their sales to other markets and exchanges around the world. The result is that prices continued to go down.
Again, I don't believe that an error caused prices to go down, though it may have been in error in judgment caused by human nature for masses of the population to feel so scared.
However, remember that fear and greed are the fuel that drives the engine of the markets. I suspect that limiting fear will have unintended consequences.
Have you heard the commentators trying to explain Thursday's massive move down in the markets by blaming computer trading, a trader's error, or the news about what's happening in Greece?
I don't believe that any of those explanations are the "cause" of the melt-down.
There's a difference between things that happen near the same time, and things that cause other things to happen. In statistics this is the difference between a coincident and a causal indicator.
An Unlikely Explanation.
Even if some trader accidentally tried to sell a billion shares of Procter & Gamble rather than 1 million shares … Do you really believe a broker's or exchange's risk-management protections would allow a billion share order (sure, an error … but not that error)? Or, do you really believe that a "fat-fingered" sale in America would cause Asia's market to go down 8%?
Think about how many market participants there are around the world. Free market buying and selling is supposed to take care of mispriced assets. If
something is too high, then people won't buy it. When something's too
low, speculators swoop in to grab the bargain.
A More Likely Scenario.
The real story is that people are scared. And unlike the recent rally, the move down was met with selling rather than buying.
There's an old trading adage that says markets climb a wall-of-worry one step at a time, then fall off the roof. In a normal up-trend, chances are you'll just hold what you own; because you have no real incentive to take action. Consequently, as recent policies and actions pushed the markets higher, many market participants simply smiled and felt good about their good fortune.
However, it doesn't work the same way when markets go down. In order to protect your profits, or avoid losses, it is important to take risk off the table. As more people start doing that, prices start to move faster, which feeds the fire … and finds even more sellers. As a result, there actually is an incentive to take massive action.
But Don't You Have to Blame Someone?
One of the interesting arguments that I've heard recently is that the crash was caused as high-frequency trading firms stopped trading in the market. In other words, the lack of liquidity caused these massive price moves.
To me, it makes sense that high-frequency trading (or other algorithmic trading systems) stopped trading during times of market turmoil. One of the primary lessons from last year's bear market is to recognize that certain systems are designed only for normal market periods.
As price and volatility move outside normal levels, we now tighten our risk and cash management parameters. Once we got past those limits, we stopped trading. Why? Because of the massive pain inflicted by not doing that the last time we saw those types of price moves and volatility.
Likewise, I suspect it's the same for many other systems traders. Each of them went through a process of figuring out what works, and what doesn't work, during different market conditions. It makes sense that they learned to trade less when they don't have an edge.
Consequently, the patterns of price movement and liquidity changed during the big move down.
Let the Investigations Begin.
Trying to figure-out what caused people to be afraid is silly. Fear
cause people to be afraid. Human nature weighs the fight or flight
instinct … and often chooses flight during dangerous situations.
And if people are trying to sell, but no one is buying, then price
will continue to fall until it's low enough that people feel they're
getting a bargain again.
On a side note, if a trader puts in a limit order to buy an asset if
gets down to a certain price (let's say $0.01 for a share of Accenture)
and there is no other buyer to fill a "market order", then crazy as it
sounds, that is what happens.
Will More Regulation Help Here?
I see both sides. On one hand, I am surprised that the Specialists weren't there to back-stop the market and take more sales at falling (yet, realistic) prices. Perhaps that merits some scrutiny?
On the other hand, in a free market environment, do you really believe that it is in our best interests for the governments and the exchanges to figure-out how to prevent markets from going down?
When the NYSE started to enforce trading curbs and slowdowns, sophisticated investors started off-loading some of their sales to other markets and exchanges around the world. The result is that prices continued to go down.
Again, I don't believe that an error caused prices to go down, though it may have been in error in judgment caused by human nature for masses of the population to feel so scared.
However, remember that fear and greed are the fuel that drives the engine of the markets. I suspect that limiting fear will have unintended consequences.
Well, that was something you don't see very often … a nearly 2000 point swing in the Dow.
Here is what that looked like intra-day.
There has been unusual volatility for a while, but this was noteworthy.
A Weekly View of the S&P 500 Index Shows the Bigger Picture.
The recent rally stalled at a well-known Fibonacci retracement level. In addition, it doesn't bode well for the bulls (at least in the short-term) that price just broke down through critical support, and on high volume.
When markets are ready to change course, we often see violent moves. The side that was enjoying the trend is fighting to keep it alive. The new side, taking over, will have nothing to do with that. Back-and-forth it goes … then all it takes is a massive move to spark a little fear and greed … and you saw what can happen.
What Does the VIX Show?
Here is a chart of the Volatility Index ("VIX") from Bespoke.
Apparently, the VIX is not the only way to measure fear in the markets. Another way is to follow what "insiders" do. The idea is that if they believe the market will get stronger, then they hold their stock.
So, What Does Insider Activity Tell Us?
According to Trader's Narrative, insider selling continues to dominate buying by a wide margin. We’ve seen a continuously extreme reading from insider activity measures for the past 12 months. The market has – until recently – ignored this vote of "no-confidence" and plowed ahead. This sustained level of selling pressure by insiders is unprecedented in recent history. Usually we see the buy/sell ratio fluctuate between the two extremes.
NYSE CEO Explains the Sell-Off.
NYSE Euronext CEO, Duncan L. Niederauer, says his exchange slowed trades of stocks including 3M, Accenture and P&G during the 998 point drop. So, you'll be happy to hear that it was a "feature" … not an "error".
We are now pretty over-sold and due for a bounce. Throughout the recent rally, pull-backs triggered buying. It would surprise me if that happened again here.
Well, that was something you don't see very often … a nearly 2000 point swing in the Dow.
Here is what that looked like intra-day.
There has been unusual volatility for a while, but this was noteworthy.
A Weekly View of the S&P 500 Index Shows the Bigger Picture.
The recent rally stalled at a well-known Fibonacci retracement level. In addition, it doesn't bode well for the bulls (at least in the short-term) that price just broke down through critical support, and on high volume.
When markets are ready to change course, we often see violent moves. The side that was enjoying the trend is fighting to keep it alive. The new side, taking over, will have nothing to do with that. Back-and-forth it goes … then all it takes is a massive move to spark a little fear and greed … and you saw what can happen.
What Does the VIX Show?
Here is a chart of the Volatility Index ("VIX") from Bespoke.
Apparently, the VIX is not the only way to measure fear in the markets. Another way is to follow what "insiders" do. The idea is that if they believe the market will get stronger, then they hold their stock.
So, What Does Insider Activity Tell Us?
According to Trader's Narrative, insider selling continues to dominate buying by a wide margin. We’ve seen a continuously extreme reading from insider activity measures for the past 12 months. The market has – until recently – ignored this vote of "no-confidence" and plowed ahead. This sustained level of selling pressure by insiders is unprecedented in recent history. Usually we see the buy/sell ratio fluctuate between the two extremes.
NYSE CEO Explains the Sell-Off.
NYSE Euronext CEO, Duncan L. Niederauer, says his exchange slowed trades of stocks including 3M, Accenture and P&G during the 998 point drop. So, you'll be happy to hear that it was a "feature" … not an "error".
We are now pretty over-sold and due for a bounce. Throughout the recent rally, pull-backs triggered buying. It would surprise me if that happened again here.
A friend was driving me to his office last week. A flashy car pulls up beside us at a stoplight, and motions for us to roll-down the window. Without even saying hello, this well-dressed man in his late-40s starts bragging about day-trades he made recently.
He asked my friend whether he bought the bank stock they talked about, and then went on to gloat about a few of his other successes, including buying Palm just before HP bought it.
When the light turned, he said "you should have listened" and drove away.
Little things can say a lot. What do you think this implies about the
state of the markets?
I hadn't seen "that" type of behavior in several years.
It reminded me of cocktail parties in the late 90s (up until about 2001). You know, where stock-picking gurus wearing black faux-turtlenecks and blazers drank expensive wine and talked about Internet stocks.
A friend was driving me to his office last week. A flashy car pulls up beside us at a stoplight, and motions for us to roll-down the window. Without even saying hello, this well-dressed man in his late-40s starts bragging about day-trades he made recently.
He asked my friend whether he bought the bank stock they talked about, and then went on to gloat about a few of his other successes, including buying Palm just before HP bought it.
When the light turned, he said "you should have listened" and drove away.
Little things can say a lot. What do you think this implies about the
state of the markets?
I hadn't seen "that" type of behavior in several years.
It reminded me of cocktail parties in the late 90s (up until about 2001). You know, where stock-picking gurus wearing black faux-turtlenecks and blazers drank expensive wine and talked about Internet stocks.
The rally finally ran into some resistance. Still, the Dow Jones Industrial Average remains above 11,000. However, the thing that caught my eye last week was that the Dow
broke below its recent trend-line. By itself, not a cause for major concern, just a key to notice. The question is whether it can get back above that level, or will this be the start of a more meaningful correction?
It is also worth noting that the MACD indicator is showing more downside momentum than it did at the same price level earlier in April.
A Peek Over the Wall.
Is
China's Shanghai Index sending a warning about the world economy or just
their economy?
Unless things change in a hurry, China's Shanghai
Composite could drop significantly. This chart shows the triangle
pattern that played-out over the past nine months.
You can think of the Triangle as a well-contested battle
between the bulls and the bears. Inside the pattern, neither side
gives-up much ground. However, when one side loses conviction, the
market surges in the direction the winners push it.
Triangles
are often continuation patterns. So, be wary that this move is a
head-fake down to trigger a big rally. Otherwise, the target is pretty
far below.
Sentiment Here in the United States is Still Very Bullish.
While stocks have certainly become more volatile in the last two weeks, newsletter writers seem to be taking it in stride. According to Bespoke, the latest Investors Intelligence survey of newsletter writers found that 54% of those surveyed are now bullish on the market. The last time bullish sentiment was this high was back in December 2007, before the crash.
Another important to measure of the crowd’s extreme bullish sentiment is that fewer than 20% of advisors are currently bearish. According to Prieur du Plessis, these are first indications of a market top.
Another Sign of a Potential Top?
The U.S. Treasury Department plans to sell “up to” 1.5 billion
shares of Citigroup in the government’s
biggest step yet to exit the 27 percent ownership of the bank it rescued
during the financial crisis. Bloomberg quotes Geithner as saying: "We’re
putting TARP
out of its misery," and "the government is withdrawing from the
financial industry after forcing lenders to recapitalize with private
money."
If you think that is funny, then so is this cartoon.
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