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Dallas, TX
May 7, 2010, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Fat Fingers, Black Boxes, And Fear Of The Dark
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What's Hot Today: |  |
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U.S. stock index futures are bouncing back in a big way on Friday.
The Euro is strengthening and everything that has gone down all week
is bouncing back, except European stock markets and Asia overnight.
The employment report could change everything or make the markets
move even higher. It's going to be a crazy Friday.
News For Thought
When the fast money goes away, things get worse. According
to The Wall Street Journl: "A number of high-frequency firms stopped
trading Thursday in the midst of the market plunge, possibly adding to
the market's selloff." The report added: "High-frequency firms have in
recent years become central to how the market operates, growing to account
for about two-thirds of daily market volume, according to industry estimates.
The firms use high-powered computers to send "buy" and "sell" orders
to the market at rapid speeds. High-frequency traders have said part
of the value they add to markets is the liquidity they bring—being at
the ready to swiftly complete a trade. Some of these firms have said
that, were it not for them, the 2008 market declines would have been
worse."
What's the bottom line? This isn't the market that many of us grew up with. This
is a market in which "black boxes" rule. And when the "black boxes" do something
extraordinary, bad things can happen.
Our next book title may be "Black Box Trading For Dummies."
Monster Employment Index registers gain. The Monster Employment
Index, often a fairly good predictor of the general trend of the employment report,
showed a nice jump on Thursday. According to the company's press release: "The
Monster Employment Index rose eight points in April as a number of industries
initiated springtime recruitment efforts. The annual growth rate further accelerated,
rising by 11 percent, the highest rate of increase since July 2007."
Government agency may get blame for oil spill. According to The
Wall Street Journal: "The small U.S. agency that oversees offshore drilling doesn't
write or implement most safety regulations, having gradually shifted such responsibilities
to the oil industry itself for more than a decade. Instead, the Minerals Management
Service—now caught up in the crisis of the Deepwater Horizon rig that for weeks
has sent crude oil gushing into the Gulf of Mexico—sets broad performance goals
for the industry. Oil producers and drilling companies are then free to decide
for themselves how to meet those goals, industry executives and former regulators
say."
In fact, the Journal further reported: "A Wall Street Journal examination of
the MMS's track record found several instances of the agency identifying potential
safety problems and then either not requiring follow-up or relying on the industry
to craft a solution. In some cases, the industry didn't do its part," and "The
Journal also found that the safety record of U.S. offshore drilling compares
unfavorably, in terms of deaths and serious accidents, to other major oil-producing
countries. Over the past five years, an offshore oil worker in the U.S. was more
than four times as likely to be killed than a worker in European waters, and
23% more likely to sustain an injury, according to International Association
of Drilling Contractors data, which is adjusted for man-hours worked."
What's most interesting is that according to some, the MMS's most important job
is to verify the amount of oil being pumped so that the government collects the
most amount of money possible from the oil rigs. Here's how the Journal put it: "Defenders
of the agency say enforcement isn't its primary responsibility. Stephen Allred,
who as Assistant Secretary of the Interior oversaw MMS from 2006 to 2009, said
the agency does conduct spot inspections of oil rigs, and checks operators' compliance
with safety procedures. However, "Their role is not to baby-sit" the operators,
he said. The agency's primary task during inspections is to verify how much oil
is being pumped, which is key to another MMS duty, maximizing payments the government
receives for oil and gas rights from energy producers." |
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Fat Fingers, Black Boxes, And Fear Of The Dark
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Stark Reality: Who's In Charge Of The Market? No One Apparently Is.
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It's important to understand what happened on Thursday.
But it's realistic to expect that some time will pass before we really
know what happened. What we have are some theories and some informed opinions
that suggest that perhaps everyone stepped back from the market at a point
in which someone may have been trying to execute a big sale of stock.
The role of high frequency trading, where computers are making trades at high
speeds may have played a role. According to market data, high frequency trading
houses account for a significant amount of the stock market's daily volume now.
Those trading houses use models that are designed to stop trading if certain
things happen, such as the market dropping below a certain point. That was one
of the things that happened.
There are other rumors and opinions from market traders that say that at one
point during the day, European traders closed shop because there was no liquidity
in the Euro. That means that a big and significant source of liquidity dried
up in the market and that suddenly there was no activity. That left one side
of the market without any support as there were no "bids" or people willing to
buy.
What we don't know, but can theorize, based on past similar periods, is that
there may have been some margin calls and that some may have been big enough
to trip the system up, especially when liquidity, or money willing to take chances
was thin, as people were closing shop and standing aside. A margin call is also
Wall Street disguise jargon for what one big player does to another when they
have some esoteric black box derivative trade that has hit paydirt.
The bottom line is that there were some remarkable technical developments which
will have to be explored and considered over the next couple of days.
Chart Courtesy of StockCharts.com
First, consider the chart of the Nasdaq Composite (COMPQ). This index plunged
through its 50-day moving average, and in the period of time when a "trading
error" is being blamed for causing the 1000 point Dow Jones Industrial average
collapse, the Nasdaq fell to its 200-day moving average intraday, and then recovered.
That's a pretty orderly error if you ask us. But what do we know?
Chart Courtesy of StockCharts.com
Next, the S & P 500 (SPX) shows a pretty similar picture, a collapse below
the 200-day moving average and a bounce back. Wow, does that suggest that computers,
machines with no human sensitivity were involved?
Chart Courtesy of StockCharts.com
Perhaps the most telling of all signs is the action registered on the NYSE (NYAD)
and Nasdaq (NAAD) advance decline lines. Both have clearly broken down, which
suggests that no matter what the reason, the market has suffered some significant
damage.
Chart Courtesy of StockCharts.com
Finally, one currency analyst on CNBC said this morning that the 1000 point drop
in the Dow Jones Industrial was triggered by the currency markets. He suggested
that the relationship between the dollar and the yen reached a point where "algorithms" to
sell the S & P 500 futures kicked in and that things unraveled from there.
He didn't speculate as to what brought the market back. If you want conspiracy
theories, you can always blame, or thank, the plunge protection team, the government
guys to buy futures when the market falls too far.
What we know is that we don't really know. And that's pretty scary.
Conclusion
Today will be a crazy day. The employment report will add another layer of confusion
to an already confused trading situation. It's not clear who's in charge of the
shop at this point.
Is it high frequency traders or fat fingered interns at big trading houses that
are causing the problem? And most important, who's got the derivative trades
that are coming to roost?
What is clear is that this market is now in one of those periods where fear of
black boxes, fat fingers, and the unknown is what will rule the day for a while.
We have added more short selling ETFs to our portfolios. And we urge caution.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Short S & P ETF (NYSE: SH) Crosses Above 50-day Line
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The Short S & P
ETF (NYSE: SH) may be in an intermediate term up trend,
which means the market could head lower.
Chart Courtesy of StockCharts.com
We added the Short S & P ETF (NYSE: SH) to our ratings
list on May 5. By May 6 it was already a useful move, as
the market plunged further and further as the day went
on. Thus, those investors who chose to add the ETF to their
portfolio got some gains out of it.
What's more important is what lies ahead, and whether SH and other ETFs that
sell the market short, will be useful in the near future.
It's important to understand several things about these ETFs. They rise when
the market falls because their sole purpose is to bet on the market falling.
ETFs that specialize in short selling can be very volatile, especially if they
are leveraged. SH is not leveraged so it trades at the same pace as the market.
That means that a 1% drop in the S & P 500 should yield close to a 1% gain
in the price of the ETF.
Most important, these ETFs have an important role to play, especially during
market periods where the trend is down as investors can use these ETFs to hedge
risk or cushion the decline in their portfolio.
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