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Are The Market's Pilot Fish, The Momentum Traders, Abandoning Stocks?
It is no secret that recently market liquidity has been horrendous: on a high-volume day like today, when intraday TRIN hit that of the Flash Crash, and closed at the fifth worst ever, there were virtually no advancers and only decliners. Yet today merely follows days in which no volume melt ups have resulted in no decliners and just advancers. This type of trading pattern has made alpha generation impossible, with those hoping to generate any "above risk free" return being forced to rely on leveraged beta plays. Yet that is mostly a concern for hedge funds, who are paid 2 and 20 to outperform benchmarks. With the current quarter about to close, and P&L for most looking abysmal (we will post the latest HSBC study shortly), look for those redemption requests to start flying. In a last ditch effort to prevent liquidations, we fully expect hedge funds to ramp up every available ounce of leverage allotted them by their Primary Brokers, and ignoring alpha, to attempt to recoup all or some losses through excess leverage. All this means is that if you thought this quarter the market was volatile, wait until Q3, when daily levered liquidations will be the norm, and intraday market swings of less than 3% will be de minimis. We won't shed many tears for the unlucky ones. Yet one aspect of the trading community that has gotten whacked, have been momentum traders: those pilot fish of the trading world, who swim blindly, scour through much delayed 13F/Gs, and merely follow the loudest and most credible (for any given day) pundit to either rags or riches. For these less than sophisticated bottom feeders, a trading environment like that one we are currently seeing has been simply destructive. A directionless market, in which no momentum can be sustained, and Crazy Ivans are the norm, results in both retail and computerized momentum chasers getting carted out feet first. Which is to be expected: major market inflection points, either downward or upward, are always the death of the marginal players. The implications of this are major: as more and more of the penny-trading crowd grow disenchanted with the current regime, look for wide-ranging implications, including both majors drop in retail brokerage volumes, and in the popularity of momentum-trader focused media.
A good example of the latter are the plummeting ratings of CNBC's 5pm staple Fast Money, long-focusing not on value investors (granted for the most part those tend to see right through CNBC's agenda), but on daily and even minutely momentum traders. According to Nielsen Media, the drop in the show's demo between Q2 of 2009 and Q2 of 2010, has been a dramatic 28%, from 75k to 54k. Sequentially, this has also been true, as the drop from May (67k in demo) to June (50k) is a comparable 25%. It is possible to claim that some of the May's abnormal viewers were due to the excess market volatility, but it certainly does not explain the plunge from Q2 2009, when following the March 666 crash, the market was a momentum trader's paradise between April and June, yet quiet on all other counts. On the other hand, perhaps we are reading too much into it - controlling for general viewership during the CNBC Business Day segment (5am to 9pm), indicates an identical plunge in broader CNBC ratings from Q2 '09 to Q2 '10 in the demo: -28%. Maybe it is not so much a loss of momentum trading viewers, as a general and ongoing disappointment with CNBC's deteriorating content. Also, perhaps CNBC should have thought twice before parting ways with Dylan Ratigan who was the life and soul of Fast Money, and now has a much more successful activist program on MSNBC.
Which only leaves retail brokerage numbers as a true gauge of market participation by the retail momentum population. With earnings season around the corner, we have a nasty feeling the Schwabs and E-Trades of the world are about to disappoint the market, as those who have not decided to leave stocks for good following 5/6 are getting wiped out on a daily basis by the ongoing inability of the market to determine any trading trend or orientation for more than 24 hours. This will also have an adverse impact on the Comscore ratings of trading focused websites and blogs, which in turn will likely result in decreased revenue generation via ad and subscription models for services targeting the momentum trader paradigm.
One thing is certain: with the SEC's persistence on not addressing any of the myriad of lack of market credibility issues brought up by Zero Hedge and other sites, ever greater numbers of retail participants will leave the market, and since this is the first line of "greater foolishness" sought by investment banks during their ritualistic offloading of stocks (also known as periods of Conviction Buy upgrades), the end result will very likely be the reporting by Goldman of a quarter in which the firm may actually not have a statistically impossible perfect trading record, for the first time in a while. Which, however, is precisely what happens when the foodchain in any ecosystem is disturbed: eventually as the bottom rungs disappear, those at the top starve, and are forced to cannibalize each other (and everyone knows that all banks are now just perpetually backstopped hedge funds: 75% of all Wall Street revenues come from trading). And those at the bottom of the food pyramid are clearly saying enough, and doing so in ever increasing numbers, reflecting how they feel about an increasingly more two-tiered market.
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I thought the TRIN has been broken for the past year because of all the trading in the 2x and 2x ETFs. Has the situation changed?
Whether it's broken or not depends on how you use it. I only watch TRIN to see how it trends throughout the day, rather than absolute levels. This trending behavior remains consistent. If you have an analysis method that depends on specific levels of TRIN then you probably want to consider constructing your own version based on equity only issues.
AMTD was destroyed today.
Excellent job presenting a meaningful and credible explanation of the phenomenon where all stocks trade together. It makes far more sense than other pundits who chalk it all up to ETFs. It may be a facile explanation, but it doesn't mean it's accurate.
Might as well enjoy the continuing crash in stocks and the ongoing meltup in Treasuries:
no momo? hardly. AMZN down about 20 points in 7 days. RIMM down about 10 points in 3 days. AAPL down 12 today (8 from the open).
i guess some things are a little toooo inflated.
http://images.wikio.com/images/p/3b9b0/nicole-coco-austin-is-only-ass-an...
Obama is long the TLT.
The momo players going into quarter's end got the wrong end of the hose. It's not supposed to work that way. Looks like early 3rd repositioning is voiding out equity bets. Bonds are smokin'. Gross was right again.
PPT has a fight on its hands to keep the DJIA 10 going.
COHIBA!
TD "Crazy Ivans"
Captain Ramius: We will pass through the American patrols, past their sonar nets, and lay off their largest city, and listen to their rock and roll... while we conduct missile drills.
"A directionless market, in which no momentum can be sustained, and Crazy Ivans are the norm, results in both retail and computerized momentum chasers getting carted out feet first."
I don't know about that one, as a swing discretionary trader, seems that I've seen lots of direction, daily and 30 minute entries does it for me.
__
Seaman Jones: Conn, sonar! Crazy Ivan!
Capt. Bart Mancuso: All stop! Quick quiet!
[the ships engines are shut down completely]
Beaumont: What's goin' on?
Seaman Jones: Russian captains sometime turn suddenly to see if anyone's behind them. We call it "Crazy Ivan." The only thing you can do is go dead. Shut everything down and make like a hole in the water.
Beaumont: So what's the catch?
Seaman Jones: The catch is, a boat this big doesn't exactly stop on a dime... and if we're too close, we'll drift right into the back of him.
__
p.s. Nice pic
Ha, ha, ha. Crazy Ivan. Yeah, Muir ! Great stuff ! Captain Ramius : Roger and out. :=)
Later in the film, Ryan claims to the Dallas captain he "knows Ramius". His crazy Iavn will be in the direction of starboard at the top of the hour and port at the bottom (forgive me on my recalling a 20yr old movie). Ramius randomly crazy ivan's to starboard and Ryan is vindicated. The Dallas captain asked how he knew. Ryan replied "50-50 chance".
Ryan's logic is sound in the market as well.
Cramer's real hazard is that many of his so-called audience are - shall we put this diplomatically - the lowest common denominators on Earth's food chain.
Cramer had better have one hell of a bug-out planned well in advance, because when this sham of a market crashes it is these same denominators that will go after his worthless ass.
Hey, Cramer, how about a bug-out plan to Cramerica?
You mean this Cramer http://www.youtube.com/watch?v=HRa0B34jMOQ
"A lot of times when I was short at my hedge fund...When I was positioned short—meaning I needed it down—I would create a level of activity beforehand that could drive the futures." He also encouraged hedge funds to engage in this type of activity because it is "a very quick way to make money".
and cocaine Kudlow ?
Cramer was at his best following the 08 crash. He spent most of his time sorting out which companies had low debt, which paid dividends, which supplied real demand, the hard core survivors. That was because so many companies were exposed as garbage. I made notes, bought a few of his picks, but saw pretty soon that gold and silver were the real movers. Once the market was pumped up from DC Cramer went back to his useless self again.
wonder how IBD/Gorilla traders are doing? The PPT might actually take the other side at some point, to try and revalue the market before the (timid) bears can jump into this market and try to ride the selloff. Especially with those cutoff times, anyone can front run orders put in the day before.
Freaking Bravo TD. It is sad but true, the retail investors are heading for the exits because after a decade of being fed Bullcrap by the "experts" and their "fund managers" they have seen that they are not really flat but down on the same monies invested in an index fund in 1999 compared to now when adjusted for inflation. The myth has been shattered and only the fleet of foot will survive the coming economic disaster and market quagmire.
In the time frame given for equity volitility, I am much more focused on Bond market volitility.
1) Municiple defaults.
2) State bond down grades.
3) Political infighting killing aid to states.
4) EU default.
5) Treasury steady increase in auction amounts.
6) Bank balance sheet hit for Q2 reporting due to reliance on equity performance.
Mark Beck
Good article.
Re quarter's end and funds which get most of their 'alpha' from 2&20... take a look at TSLA today and try and tell me that was not a window dressing long play.
Company that won't generate any $$ till 2012, no real marketing plan out yet, and all of a sudden IPO is priced as if it was 2007. But hey, watch for another run tomorrow, just in case the PMs need to show their AUM are invested in sustainable and responsible choices.
Will the last HFT please close the lights on the NYSE floor.
Ironically, this may be the time to follow Faber's advice, buy those companies with unblemished fundamentals and SIT ON THEM. The miners. Cheap energy producers, solid-balance sheet tech stocks. Buy-and-hold just may be the way to go...
To get through this playland it is important not to chase stuff or targets and not to overtrade. Just buy them on any decent dips and hold them, because even IF you can't make a killing right away, there WILL be a flight to quality sometime after this all washes out...
And...$100 profit a trade is no longer to be sniffed at...!
Or short and hold.
When the bottom falls out you have to be in cash, the floor is way below 08. You want cash to buy the sub basement bargains. Now is a good time to sort out what might be worth buying down there. Even the gold and silver miners may take a hit when the market panics, even if the physical metal is boosted by the chaos this time. 08 was just a taste.
Equities are just corporate-issued currency. The currency remains fungible so long as the corporation is a going concern.
After all, securities are nothing more than linguistic constructs. Not that I'm po-mo or anything, but it's the truth.
Even in hyperinflation, equities can retain some value.
You have a better chance by turning on your vacuum and lifting your sofa cushions to collect profits.
I'm not a retail trader. Can only tell you that some social circles have gone into the cash sidelines.
This market is in 'Grand Thief Auto Mode.'
The bubblevision CON artist aka Market Economist have priced themselves into unemployment. The lies & deceit will land these carnival barkers into a long soup line. They now only get 26 weeks of unemployment.
If you are a momentum trader I'll eat my hat and shoes that NOT one of use watched the close today.
Pigeon shit slop trading action. The volume was too low to escape and the range sucked a donkey dick.
Who trades this? Honestly. Only a HFT would.
I have never been much of a day trader, or momentum trader. I was the typical buy and hold guy although I tended to reallocate each year based on what I thought would do well that year.
Got hurt in '08 by energy, made it back plus a little in 09 in HY. Now other than some tiny short positions, I am totally in cash to intermediate IG and GOV bonds.
The only way I will go back into the market is to short it on the way down (once I see a major breakout, maybe). I'll let the smarter guys try to figure out the market direction for now.
Unless HFT is outlawed and brokerage firms (like the Squid) are banned from proprietary trading, I don't think I will ever put more than a few percent of my money in stocks. The guy handling your order should not be allowed to trade against you or frontrun you.
Bonds may be approaching a bubble but stocks are just a casino (with a rigged table).
Next group of blind sided investors will be Muni Bond Holders, who have been brainwashed that these investments are super conservative. Many upper class folks are 100% in munis. I predict defaults and restructurings.
Someday, they will realize you don't buy moral obligations of immoral politicians.
There's a nice old lady that walks her dog by my house. Back in late 2007 we talked about investments and I told her things were bad behind the scenes and she should take her large profits and go to cash. Like everyone else she looked at me like I was crazy. Have seen her many times after that conversation and she mentioned she should have listened to me. But we never talk about investments anymore because I don't talk about investments anymore. We just make small talk.
Anyway ..... just saw her a week ago and she told me she just got out of all her stocks and is now in cash. She told me she thinks Obama and all financial people are lying about what's going on. I said she was smart and not to look back on w/e manipulations there are going forward. Peace of mind in cash after the ride she took hopefully will add many more years onto her life.
The folks are catching on I thinky. The propaganda and reality are conflicting real bad now and the sheeple can't deny the reality staring them in the face any longer. And let me add ..... that Obama, Bernanke photo op today was disgraceful. The stench is getting unbearable. These people are downright evil.
I think the question about cash is when to get out of it as well. Deflation => Deflation => Hyperinflation. The Weimer hyperinflation came on quickly, and wiped out the savers and the liquid.
Simple answer to when to get out of cash is when "everyone" is in cash and I beleive that is soon . If you know somebody who would never cash out their 401k and they have it is time to start buying real assets becasue hyper inflation is around the corner and the Fed and goldman will then rob people of their cash savings . Another good place to get out of cash would be SP 666 or lower- Take your cash and go and get every useful object you can find in a store because QE2 is going to destroy the dollar .
Those who have a trading system that can make sense out of the heightened volatility actually have it made in this type of market. The trend chasers and "easy money" guys are in a heap of trouble. The problem is, the market can change on a dime and without a system that can recognize it, the trap door opens and, whoosh!
I actually think of myself as a pilot fish (good analogy). I am too small to be noticed, and follow the sharks because they know where the food is. I run a small institutional boutique and missed calling the "Flash Crash" by a day. But I was prepared and my clients were warned. I actually sent an article warning of an impending crash to ZeroHedge, but they chose ot ignore it.
The downside of trading this market is migraines and being shackled to a computer all day. Is there any other way? I keep asking myself this question and don't have an answer.
I plan on being a survivor. That's it.
Animals often head for the hills in the days/hours preceding large earthquakes. Subsonic rumblings or some sixth sense tips them off.
The markets in Asia are in the dumps again.
I think the whole world woke up this week and realized someone else shit their beds while they were sleeping.
I think the time is getting closer. Older Denninger post, but one of my fav's. I believe we have pretty much retraced to the point where things fall off the cliff. Time will tell. I hope this experiment ends soon.
http://market-ticker.denninger.net/archives/2355-Whistling-Past-The-Grav...
i fail to see how the "loss of liquidity" hurts hedge fund traders at all. indeed volatility has been off the charts since 2008. it's the deal makers as i see that "get killed." not that the firms really exist anymore but why should anyone who isn't being forced (BP comes to mind) give these clowns on the street a dime right now? the only reason is "they're being forced to because they're business is going down the crapper." Airlines come to mind. Other than that--internal growth, or die. the only two exceptions which of course is why we have Cramer is nat gas and "the mobile interenet sunami." to BIG exceptions--amazingly that appears to be it. on the other hand dealing with sovreign debt spreads that are truly epochal sounds like made to order hedgie strategums.
robo trader..
for you sexiii http://www.youtube.com/watch?v=hM79IhkbbAg&feature=channel
Since when need MOMO traders an upward trend ?????? It works both directions, Mr. TD !
Does anyone have an opinion on buying the Prudent Bear Fund now?
Yes they are abandoning this market, and you can't blame them. IMO when its impossible to pick direction, don't try. For years I have sold options and made money, but there re times when you have to switch and I have done.
1. Buy AtM options when the VIX is sub 25, especially on mondays. Gamma hedge every 30 minutes or 20 bps. See the money, take the money. See the money take the money. It's not for everyone, but really all you need is a Black-Scholes option calculator.
2. Buy VIX futures sub 25, and wait.
In a choppy fucked up market as Tyler describes, either will make a lot of money. I think the VIX loves flash crashes because everyone panics - even the machines.
One of the best analysis pieces I've seen on here - thank you very much...
Certainly a lot of details like that to take into consideration. Thanks windows vps | cheap vps | cheap hosting | forex vps