Good Evening,
You know, I am constantly looking for different ways to describe the current market and the market of the past three years. I do so because I understand that not all people get the same message. I endeavor to make them all understand exactly what is going on now in order to prepare them for what might come. This market is fueled by two things: #1 the FED money being injected through quantitative easing and #2 Computer Trading – more recently referred to as HFT (High Frequency Trading). HFT arguably may not be going anywhere, but could become more regulated in the near future. The FED money though, will be gone at some point. The question we all have to answer is what will the market be like with HFT? Will it be regulated? Most of us that traded prior to HFT becoming a dominant market force around 2008, used such tactics as sell into strength and buying again when the market corrected. Of course, I am talking about a correction of 10% or more, not these 3 to 5% dips that we have experienced since 2009. Those of you who have only been trading since 2009 probably think we are crazy. After all, all you really have to do is stay invested in equities 24/7 right? Maybe now….But what about when the FED money is gone? What about if they regulate HFT? Those of you who are banking on things always being like this are putting your foundation in sand. Yes, I and other money managers have adapted to this type of trading, but we are not so naive as to think that this will last forever. Will it return to the good old days prior to 2009? Probably not, but what it will turn into is yet to be determined. The bottom line is this. It is a harder environment in which to make money and will probably be so for some time to come. I said all that to lead into this: RevShark (James Deporre) wrote about just this thing this morning. I am posting his commentary here as it is extremely relevant to what we face now and in the future. Here it is:
| 04/03/14 7:58 AM: Morning Thoughts
The Nasdaq has had a strong four day bounce as it heads into resistance in front of the important jobs news that is due out on Friday. Logic would suggest that we might be due for some sort of consolidation to digest gains but logic would have lost money in this market the last few years. When we have a straight up bounce for four days the best bet is that it will continue for 5, 6 and 7 days.
Just look at what happened in February after we hit a low on February 5. We were up 8 days in a row and 12 of the next 15. Last November the bounce was six days in a row, in October it was 10 out of 12 days and in June and July it was 15 of 17 days. Once we start to bounce we just keep going.
This behavior is largely a function of the cheap capital created by the Fed and computerized and HFT trading. The combination of those two things give the market a consistent upside bias. Traders know it and embrace it. They jump in and don’t even think about trying to fade strength.
In the ‘old’ days fading strength used to be a viable trading strategy. You could sell into strength and then rebuy lower when things cooled off and we had some pullbacks. That was the bread and butter play for many traders but simply doesn’t work very often anymore. Now the strategy is that if a stock is up 5 or 6 days in a row we should bet that it will be up again. Relative strength begets more relative strength.
As traders our job is to adapt to this sort of behavioral change. We don’t question it or fight it. We jump in, embrace it and try to make some money. The easiest thing to do is to dismiss it because it doesn’t feel right or logical. That costs traders a lot of market. If the market acts irrationally we don’t have any choice but to accept it.
I have to constantly fight my own tendency to not fully embrace the market action because I’m nostalgic for the old days when we had a normal ebb and flow and we didn’t have computers creating such lopsided action. As I’ve discussed lately I blame this shift in price action on HFT and computerized trading but while it is receiving much scrutiny at the moment it sure doesn’t look like it is going to go away any time soon.
According to Bloomberg high-frequency trading makes up 50% of total stock market volume in the U.S. Is possible that it doesn’t have an impact on prices? The media seems determined to dismiss the HFT debate because they are afraid will scare away their customers. They are petrified by the word ‘rigged’ and maybe that is unnecessary hyperbole but if you think that half of the total market volume is irrelevant then you don’t understand how markets operate.
We are going to continue to hear much more about HFT but today’s business is dealing with this market. We have a bounce and that means we should have a bullish bias. It looks very slow to me and there may be some folks on the sidelines in front of the jobs report on Friday but you need to keep looking for buys rather than trying to time another market top.
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Dow, S&P 500 flat after record highs
| 04/02/14 | |||||
| Fund | G Fund | F Fund | C Fund | S Fund | I Fund |
| Price | 14.3717 | 16.0165 | 24.5587 | 35.1108 | 25.9 |
| $ Change | 0.0009 | -0.0306 | 0.0742 | 0.1005 | 0.0389 |
| % Change day | +0.01% | -0.19% | +0.30% | +0.29% | +0.15% |
| % Change week | +0.03% | -0.32% | +1.82% | +3.12% | +1.16% |
| % Change month | +0.01% | -0.31% | +1.02% | +1.53% | +0.56% |
| % Change year | +0.59% | +1.75% | +2.86% | +4.28% | +1.31% |
| L INC | L 2020 | L 2030 | L 2040 | L 2050 | |
| Price | 17.0032 | 22.1861 | 23.9582 | 25.4254 | 14.4246 |
| $ Change | 0.0078 | 0.0279 | 0.0387 | 0.0476 | 0.0310 |
| % Change day | +0.05% | +0.13% | +0.16% | +0.19% | +0.22% |
| % Change week | +0.37% | +0.96% | +1.24% | +1.45% | +1.64% |
| % Change month | +0.19% | +0.50% | +0.64% | +0.75% | +0.85% |
| % Change year | +1.11% | +1.79% | +2.13% | +2.38% | +2.57% |
