Humor says a lot about the underlying truth of a situation.
Here is a video that pokes fun at BP's handling of the oil spill.
Here is an image about how to plug the leak, showing a sentiment popular with a segment of the population.
Yet, here is a cartoon that points out how tough it is to avoid a no-win situation.
Here is a picture that puts things in perspective. It overlays a representation of how big the oil spill is, now, over a map of where you live. Since I live in the Dallas-Fort Worth area, here is the result. Try it yourself by clicking the graphic.
The disaster in the Gulf started with an explosion on the BP operated Deepwater Horizon oil rig on April 20, 2010. Current estimates put the amount of oil being discharged from the broken well at above 1,050,000 US gallons per day. No one ever said cleaning up an oil spill was cheap: the U.S. government served BP with a hefty $69 million bill for the initial costs of contending with the worst oil disaster in U.S. history. Here is a link to a site devoted to the spill and its fallout.
Reading about it is one thing ... However, seeing what is happening is often a better way to gauge reality. So judge for yourself; here is a live stream from an under-water "Spill-Cam".
It comes from PBS.
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BP said Saturday that its latest attempt to stop the gushing oil well in the Gulf of Mexico was unsuccessful, and the effort, known as a “top kill,” was being scrapped in favor of yet another maneuver to stem the flow spreading into the waters.
Sometimes, an ounce of prevention is worth a pound of cure.
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The Dow Jones Industrial Average broke below 10,000 last week. Then again, it also crossed right back above that level. If it seems like 10,000 has been one of the most 'magnetic' 1,000 point thresholds, you are right. On the other hand, is it a meaningful trading level?
All-in-all, May was quite a month! We saw a "flash crash", followed by a 400-point relief rally, followed by a slow motion free-fall, followed by a nearly 300-point rally. The cherry-on-the-top was last Friday's triple-digit drop going into the long weekend.
Putting the Dow's Drops and Rebounds in Perspective.The market's recent "flash-crash" ranks as the largest point-wise drop in history. But how does it stand up percentage-wise; and how many drops greater than 5% have we seen? Minyanville posted a visualization of the data (going back to 1928) that answers those questions. Click to the graphic for an interactive version.
One other point worth noting, historically, big gaps and daily rallies occurred most often in the context of bear markets. They are not usually a sign of impending calm waters or smooth sailing.
Nonetheless, we've seen a decent pull-back and there are signs that the short-term might offer some upside bias.
Recently, Bearish Spikes Have Provoked Bullish Responses.
Bespoke reports that this week's sentiment surveys from Investors Intelligence and the American Association of Individual Investors showed sharp increases in bearish sentiment among both advisors and individual investors. The chart below compares the S&P 500 with bearish sentiment since the start of 2009. The current level of combined bearish sentiment is the highest since the start of November. As shown in the chart, since the market bottomed back in 2009, spikes in bearish sentiment have actually turned out to be pretty good buying opportunities.
So, let's look at the market. Short-term, here is David Singer's bullish case for the S&P. It is drawn on a 60-minute chart, and shows a series of head and shoulder bottom patterns. The implication is for a rally that measures the same distance as from the neckline to the head.
Longer-term, Singer shows a potential head and shoulders topping pattern on a daily view of the S&P 500. Click it to see a larger version.
We'll see. Hope you have a good week.
Business Posts Moving the
Markets that I Found Interesting This Week:
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Officials from the U.S. Department of the Treasury, the Federal Reserve Board and the United States Secret Service unveiled the new design for the $100 note. Complete with advanced technology to combat counterfeiting, the new design for the $100 note retains the traditional look of U.S. currency.
If you haven't seen one in person yet, here is what to expect.
Here is a link to an interactive graphic that lets you explore the features of the new note.
Here is a video from the new Currency Channel.
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It's time to talk about American Idol (with the Finale this week, and all).
Sorry, my mistake ... another bad jobs numbers came out & the markets went down ... so it is time to talk about the American Idle.
Last week was rough for the bulls; and if not for a reversal after the opening bell on Friday, it would have been a lot worse. Consider this: The Russell 2000 gained 2.5% after the open on Friday and still finished with a 6.44% loss for the week. So, yes, it could have been a lot worse.
Was That a Key Reversal Day in the Markets Last Friday?
The S&P Index 500 technically complied with all the rules of a "key reversal day." It plunged to a new low of a significant decline. It then rallied up on increasing volume, and closed well above the prior close.
And here is a longer-term chart showing the S&P on a weekly basis.
We will see if there is some buying triggered here. If the bull-market swing is to continue it has to kick-in soon.
But Where Is the Selling Pressure?
With the market in a dizzying decline, why haven't we seen more committed bearish bets? Are traders going flat instead of short?
One reason is discussed by Carl Swenlin. His assumption is that bull market declines will be short-lived, and that a neutral signal eliminates market exposure during a correction, while at the same time addressing the lower probability outcome of a full bear market decline. In other words, we never know if a bull market correction will actually be the beginning of a new bear market, but we do know that most of the time it won't be, so it makes sense to bet with the odds and go neutral.
I saw a list that I wanted to share. It from the Dash
of Insight blog, which is a consistently good source of information. Here is an excerpt.
"I am pretty fussy about economic news related to jobs and housing, and I did not like what I saw.
The high volatility in trading is frightening to nearly all investors. Thursday was especially bad. The extremely late rally on options expiration day makes the week's pricing look a bit better, but most observers will need much more convincing."
VIX Approaches Pre-2008 Record Highs
The Volatility Index is spiking.
When the VIX rises as it's done the past two weeks, emotions rule the market.
Bill Luby found that, prior to 2008, the VIX only managed to nudge its way over a reading of 45 on three instances:
The table below summarizes the top ten pre-2008 VIX closing highs. Last week’s VIX spike to 45.21 would put it at #3 all-time outside of the 2008 financial crisis.
Will fear subside, or will volatility continue to soar? That will be one of the keys to the market worth watching next week.
Business Posts Moving the
Markets that I Found Interesting This Week:
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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.
It gets more curious, because it wasn't just Goldman. Bank of America, Citigroup, and JPMorgan each also recorded a perfect quarter of trading profits. What are the odds of that happening? Apparently, pretty high under their current operating conditions.
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.
It looks like the Banks figured that out.
Goldman figured it out sooner.
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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.
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?
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.
Next, take a look at this. The NYTimes came up with an interesting graphic depicting Europe's web of debt.
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.
Business Posts Moving the
Markets that I Found Interesting This Week:
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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.
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.
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Capitalogix Commentary for the Week of 06/07/10
This week marked the first time that the S&P 500 Index had two up-days in a row since April 23rd. In contrast, remember that we used to be surprised about not having had two down-days in a row for an extended period during the recent rally. Sometimes that is the nature of this market - it either has a relentless bid, or a relentless offer ... and nothing in between.
The Changing Character of the Market.
The chart below shows that things have, in fact, changed. The green-shaded area shows the smooth trend upwards on a daily chart of the S&P 500. The pink-shaded area shows where things changed. Moves became rougher and more volatile. The series of lower highs and lower lows indicates a trend shift downwards. Likewise, the failure to get back above the 50 or 200 day averages are bearish signs.
How Do You Spell Volatility?
The move down hasn't been smooth on other markets either. Since the beginning of May, the Dow Jones Industrial Average has made a three-digit move in either direction on 17 out of 24 trading days. The steepest loss over that period came on May 6, the day of the four-digit “flash crash.” The biggest gain came just two trading days later, on May 10.
That trend continues; just this past Friday the Dow dropped 324 points, its second worst slide of the year. As a result, the index closed below 10,000 for the second time in two weeks.
We are not alone. Many world markets are suffering. For example, concerns about Hungary suffering a Greek-like crisis pounded the Euro to a four-year low.
Prechter Says: “Even $1 Trillion Can’t Save the Euro, But Gold is No Safe Haven”.
The euro’s recent loss has been the dollar’s gain, which means that it’s not the best time to buy the U.S. dollar. Meanwhile, the most popular alternative to currencies, gold, isn’t such a good buy either. Here is an excerpt from Robert Prechter’s interview with Yahoo! Finance Tech Ticker host Aaron Task to hear what Prechter thinks is in store for the U.S. currency and gold.
Labor Market on the Ropes.
May employment report was a sucker punch. On the surface, the Labor Department reported that nonfarm payrolls increased by 431,000. However, a deeper look shows that private-sector job growth was a mere 41,000 jobs ... and 411,000 of the new positions were temporary census jobs.
I remember when this cartoon was an absurd commentary on big government. Now it is funny that we thought that would be enough to fix things.
This chart provides some perspective on the US job market. Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery, however, job growth was unable to get back up to its long-term trend (first time since 1961). More recently, nonfarm payrolls have pulled away from its 40-year trend (1961-2001) by a record percentage (bottom chart). In fact, the number of US jobs is currently at a level first reached in early 2000.
Business Posts Moving the Markets that I Found Interesting This Week:
Lighter Ideas and Fun Links that I Found Interesting This Week
Posted at 09:20 PM in Current Affairs, Market Commentary, Trading | Permalink | Comments (0) | TrackBack (0)
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