This page has been archived and commenting is disabled.

On The Death Of Stat Arbitrage And The Sound And Fury Of Stocks, Signifying Nothing

Tyler Durden's picture




 

There was a time when the travesty that is capital markets had at least some logic to it. Then about a week ago, everything snapped when rumors that a major stat arb desk had blown up swept through the market, following days of ridiculous ongoing market action. Below we present a chart of the three major correlation factors: ES, the 2s10s30s butterfly, and the AUDJPY which historically have correlated around 0.9+. No more. One can clearly see the snap the occurred on Monday as the spreads between various assets no longer matter, correlate or are in any way relevant. Computers now trade stocks, but without any factors or signals. The market is one big robot on autopilot, buying blind through a fog in which every move it does is a Brownian motion inspired jerk. There is no longer any rhyme or reason to what stocks do (as opposed to before, when the rhyme and reason were just barely there) - it is only noise. Our suggestion, as has been the case for over a year - take your money to Vegas. Better odds, better fauna, better pool parties. As for that gold investment - the time to take first profits is coming soon... at around $2,000.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 09/16/2010 - 11:20 | 585340 mjbommar
mjbommar's picture

Remember those SPY patterns and the algo lunch hour?

Intraday Correlation Patterns between the S&P 500 and Sector Indices

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677915

Thu, 09/16/2010 - 11:49 | 585426 Missing_Link
Missing_Link's picture

Thanks for the link.  Very interesting paper.

Thu, 09/16/2010 - 11:50 | 585432 mw1
mw1's picture

Yes, a good read.

Thu, 09/16/2010 - 15:02 | 585962 mephisto
mephisto's picture

Agreed, thx for the link. 

So in the last hour we have high return correlations and volume correlations? Hmmm, I dont think anyone in the market or on ZH regularly will be surprised by that one.

Thu, 09/16/2010 - 11:24 | 585353 HarryWanger
HarryWanger's picture

Actually keep buying AAPL. Seems to be the safest place for your dough. This market with AAPL nearly 20% of Naz and SPX, can't make major moves without this giant participating. And since it is clear that there is not even a hint of slowing the hunger for everything with an apple on it, you're best to just go with the winner.

Thu, 09/16/2010 - 11:40 | 585400 mephisto
mephisto's picture

May I be the first to junk that sheepish nonsense.

Thx.

Thu, 09/16/2010 - 11:44 | 585416 HarryWanger
HarryWanger's picture

Really? It's up about 240% in a year and a half. It's weight in those indices is enough to move markets in big numbers. But guess what? Everyone wants their stuff. The demand is insane and continues. Here you have such an enormous company growing incredibly and pretty cheap going forward. 

Now you tell me - if that's 20% of an index and its continuing a torrid growth rate, it doesn't take a genius to tell you what the indices will do.

Thu, 09/16/2010 - 11:52 | 585439 Missing_Link
Missing_Link's picture

Pfffft.  Are you seriously trying to sell that "it's a bubble, so climb on board" nonsense on ZH?  Shouldn't you be hawking that to the sheeple on Minyanville.com?  Or maybe the Jim Cramer fan club?

I don't know, somehow I think the folks on these boards are just a wee bit more sophisticated than the folks who say, "Wow, everybody else is doing it, so I should too!"

Thu, 09/16/2010 - 12:00 | 585456 HarryWanger
HarryWanger's picture

No, I've been pretty consistent in my positions short or long and have posted them here. I hold precious metals but also short when the market runs in that direction.

I'm pointing out the obvious which seems to go over the head of "sophisticated" folks like yourself. AAPL is not a bubble stock - Salesforce is, Priceline is, etc. AAPL is trading at 15 forward p/e. That's not a bubble. It's growth is insane and continues unabated. 

The point is, no matter what you think of the broader economic data, when a stock is 20% of an index and keeps climbing, it makes it very difficult for the index to fall. 

I know that's a simple logic for "sophisticated" folks like you but maybe, just maybe you should consider the obvious occasionally.

Thu, 09/16/2010 - 12:07 | 585477 -1Delta
-1Delta's picture

I have puts on my PM for the exact same reason.... everybody is on the train, when the ride is over- get off like a 13 yr old looking at Robo's pics. U my friend by admitting to AAPL and GLD= sheep. Do you own the 10yr too lol...

Thu, 09/16/2010 - 12:12 | 585492 HarryWanger
HarryWanger's picture

I've been in gold (physical since upper 300's - avg. per oz $420's). Not a sheep on that one. 

As far as AAPL, I'll jump off as soon as I see it turn. I'm trailing it tightly as it moves up. I agree, once it turns for any reason, the market tanks. Until then, staying on for the ride.

Thu, 09/16/2010 - 12:29 | 585539 brodix
brodix's picture

I have to agree on that one. As along time apple user, I've often pointed out they are just less trouble, but everyone still wanted pc's because everyone else had them. Now the dam is starting to break and the herd is moving to apples.

Thu, 09/16/2010 - 12:43 | 585573 ZeroPower
ZeroPower's picture

Lol. Fuck apple computers, all they have is a kick ass phone. The iphone 4, even despite having shitty reception and being barely available (forget the wide choice of colors) is still on back order at most phone shops i visit. So yes, they can make an appealing product which people eat up. But thats it.

Thu, 09/16/2010 - 13:00 | 585611 Deflationburger...
Deflationburger with Fleas's picture

Anybody that buys AAPL here as a market proxy needs to be lobotomized.  On un-lobotomized, whichever it is.  The unsystematic risk in the stock is ridiculous.  Heaven forbid they stub their toe, the whole world will pile out of that stock in a microsecond.  It will have several flash crashes of its own that day. 

Go through and try to find a Large Cap manager or fund that doesnt have at least a 3% position in AAPL.  Go on, I dare you.  You wont be able to do it.

Thu, 09/16/2010 - 13:07 | 585630 Ben Graham Redux
Ben Graham Redux's picture

I don't own Apple - you lose.

Thu, 09/16/2010 - 13:03 | 585616 Almost Solvent
Almost Solvent's picture

Exactly. Cost factor will always hold back Apple from taking over the market. Top of the line HP/DELL always 50% or more cheaper than top of the line MAC.

 

Now, if they start selling their iPhones on VZW, look out! They could double their numbers inside a year.

Thu, 09/16/2010 - 13:15 | 585661 HarryWanger
HarryWanger's picture

Exactly - and what happens to the Naz and SPX which AAPL comprises about 20% of? Follow the leader upward. That's the point. 

As to the poster above, you are correct, if Apple stubs their toe - look out market. Problem is, they're doing a pretty good job of wearing stylish steel-toed boots.

Thu, 09/16/2010 - 15:10 | 585977 mephisto
mephisto's picture

Junked again - its the other way round Harry. Apple is now macro. Macro is not apple.

The classic risk scenario is a Tokyo earthquake, for example. Takes 15% off the Nikkei overnight. Europe -10%. SPX futures 10-12%, beta makes the Nasdaq -15% too. Correlations go to 1. Dollar to the moon.

So your stock is down 15% minimum pre-open, overseas sales just collapsed in the 2nd largest economy in the world, your stock is denominated in a currency that just spiked, and every trend following dumb fuck is long. Question - what happens next? Does your stop get filled?

 

Scenario 2 - Steve Jobs expires overnight while humping chickens while downloading kiddieporn. Same price effect, IMO, same question.

 

Congratulations Harry you are short macro risk, micro risk and concentration risk. Sleep well.

Thu, 09/16/2010 - 12:03 | 585467 -1Delta
-1Delta's picture

+10

WHEN THAT MOTHER BREAKS TREND..... well i will have my largest short ever- ever- and that includes 08 copper and CAD

Thu, 09/16/2010 - 14:07 | 585834 homersimpson
homersimpson's picture

I'm the 11th to junk him.. Geez. He's gotten back to his old pumpin' phase again. Fool me once, shame on you, Fool me twice..

Thu, 09/16/2010 - 11:24 | 585354 unwashedmass
unwashedmass's picture

actually, i'm seriously enjoying the government's efforts to keep the HUI in check....its given me the opportunity to get a nice position in the gold/silver equities......without rushing.....

so we do have to thank them for that -- their efforts to ram these stocks down has created insane, mindblowing opportunities. i mean, some of these stocks, you get gold at under five bucks an ounce.......

 

Thu, 09/16/2010 - 11:24 | 585355 unwashedmass
unwashedmass's picture

actually, i'm seriously enjoying the government's efforts to keep the HUI in check....its given me the opportunity to get a nice position in the gold/silver equities......without rushing.....

so we do have to thank them for that -- their efforts to ram these stocks down has created insane, mindblowing opportunities. i mean, some of these stocks, you get gold at under five bucks an ounce.......

 

Thu, 09/16/2010 - 12:17 | 585441 ArrestBobRubin
ArrestBobRubin's picture

I think you've got a great outlook and strategy here. Like gold and silver, the true market value of many fine PM miners has been way surpressed. But the ground is shifting under the feet of the manipulators. They've been holding a massive beachball at the bottom of the pool. But now they need to come up for air, and we'll all be there to bash their brains in when they try to get some.

Over the past 2 years I've learned firsthand that the best value and opportunities in the miners is NOT the majors. As well as ABX, NEM and other bigs have done recently, the really big (at times jaw-dropping) returns are actually offered by the Junior Resource sector and the exploration outfits within it. The strategy here is to buy their shares before they release drill hole results, then hold on for the ride up when good news comes back.

I bought:

- Northern Tiger Resources (NTGSF) 3 weeks ago at .28, today: .64

- Silver Quest Resources (SQIFF) at .54, today: .74

- Almaden Minerals (AAU) 6 weeks ago in the low 1's, today: 2.59

- Timmins Gold (TMGOF): bought at 1.37, today: 2.01

- ATAC Resources (ATADF): bought at 1.87, today: 5.69

I just wanted to provide a few concrete examples that really illustrate my point: buy best of breed PM explorers for maximum returns. With the rise of gold and silver, you have a steady wind at your back. Kindly see my comment further down, some of the other miners listed there may really interest you.

Best of luck in your trades.

Thu, 09/16/2010 - 11:30 | 585367 Robslob
Robslob's picture

Tyler,
Just be bullish for 1 week and I guarantee this market would go down!
Thanks,
I'm short

Thu, 09/16/2010 - 11:31 | 585375 TheGreatPonzi
TheGreatPonzi's picture

lol, it's worth the try

Thu, 09/16/2010 - 11:28 | 585364 RobotTrader
RobotTrader's picture

Hard to be negative on the market when Ford is breaking out out of a huge base.

Clean breakout over the 50-day.

 

Thu, 09/16/2010 - 11:36 | 585388 HarryWanger
HarryWanger's picture

Fair enough but of all the data out this morning the biggest point by far was FedEx CEO saying he sees slowing up ahead. And, does this sound familiar, raised full year guidance and will cut 1,700 jobs. 

FedEx is everybody's darling thermostat of the economy when it says good things but suddenly not so relevant when the words are so optimistic. 

Thu, 09/16/2010 - 11:55 | 585444 HarryWanger
HarryWanger's picture

Sorry to reply twice to your post but it's hard to believe 5 people would junk you on pointing out a valid move. It's like I said above with AAPL, up 240% in a year and a have. It's 20% of Naz and nearly that of SPX. How do people think the market can make any major moves without a stock like that participating??

Thu, 09/16/2010 - 12:04 | 585472 Ben Graham Redux
Ben Graham Redux's picture

While I won't touch Apple, I think your strategy is a good one.  Maybe I just doomed you to failure but I seriously resent the abuse guys like you and Robo take because you're unwilling to follow the gloom/doom perspective that pervades this site.

Thu, 09/16/2010 - 12:13 | 585491 Red Neck Repugnicant
Red Neck Repugnicant's picture

People junk RoboTrader because he taunts the gold idiots around here.

Saying anything negative about gold on ZH is like forcing a group of white supremacists to watch an entire season of The Jeffersons.

http://www.youtube.com/watch?v=p9y4iXAso4I 

Thu, 09/16/2010 - 12:19 | 585512 Ben Graham Redux
Ben Graham Redux's picture

I'm one of those gold idiots but when did it become a crime to have a difference of opinion?

Thu, 09/16/2010 - 12:50 | 585588 ArrestBobRubin
ArrestBobRubin's picture

He's a redneck and repugnant and evidently proud of it. So you do the math...

Sincerely,

A Gold Idiot

Thu, 09/16/2010 - 14:11 | 585840 homersimpson
homersimpson's picture

Well, to leftists, having gold is a crime. We don't want to devalue Bernanke's green toilet paper, do we?

Thu, 09/16/2010 - 12:28 | 585535 HarryWanger
HarryWanger's picture

Count me in as a "gold idiot" too. Been holding it physically for a loooong time. But you're point is correct. I think many here can't make the distinction between the markets and the economy. If the unemployment rate is hovering around 17% and people gobble up every device Apple puts out, you have the perfect example of how the markets and economic data don't relate necessarily. 

Thu, 09/16/2010 - 13:27 | 585698 RockyRacoon
RockyRacoon's picture

... the distinction between the markets and the economy.

Well, fuck me runnin', but I thought they were related!  I gotta go back and rethink the whole concept.  How stupid of me to have thought that the stock market had some relation to the ignoramuses standing in line at 3AM to buy Apple shit.  How can you, on one hand, say that the "market" is unrelated to the "economy", and, on the other hand tout a stock that depends entirely upon the purchase of their product.  I guess I'm just THAT stupid.  Before you tear into me on some detail or other, think about your position.

Thu, 09/16/2010 - 13:45 | 585757 HarryWanger
HarryWanger's picture

"How can you, on one hand, say that the "market" is unrelated to the "economy", and, on the other hand tout a stock that depends entirely upon the purchase of their product."

Again, think about it logically, if 17% of the country is unemployed or underemployed yet Apple can continue to grow dramatically AND AAPL represents nearly 20% of the most closely followed index on the planet, do the math.

It's not that difficult. 

Everyone assumed AAPL would tank during the darkest days of 2009. With all this unemployment, they said, who is going to buy these gadgets? Well, a whole goddammed lot of them. And they continue to do so. 

If AAPL were an insignificant part of the SPX, the correlation would be meaningless. But at nearly 20%, this tail wags the dog. 

I'm trailing with tight stops on the way up - have been. If AAPL now above 272 drops to 270, I'm out. And, if it continues to decline after that, go long SDS. Pretty simple.

 

Thu, 09/16/2010 - 14:56 | 585944 RockyRacoon
RockyRacoon's picture

I think I have it.  Even in the deepest, darkest days of the Great Depression people went to the movies as a diversion (it was cool in the theaters as well).  Also, there were dance marathons and the county fairs boomed.  So, in the grand scheme of things, Apple is the 21st Century great diversion, and is affordable as a percentage of incomes.  Shoot, even a person in unemployment can buy the stuff.  It also explains FaceBook and Twitter.  I can go along with that.   Buy AAPL!

Thu, 09/16/2010 - 16:41 | 586229 MichaelG
MichaelG's picture

Say it ain't so, Joe!

Thu, 09/16/2010 - 13:38 | 585744 reading
reading's picture

Do you actually think AAPL can compensate for all that ails the economy at this point?

 

Thu, 09/16/2010 - 13:47 | 585768 HarryWanger
HarryWanger's picture

No, it can't dent the problems of the economy. But it can move the stock market due to its enormous market cap. That's why I'm pointing out that the two, market and economy, are really unrelated. Economy is stagnant at best but the market can rally when the company comprising 20% of that market continues to rise.

Thu, 09/16/2010 - 13:01 | 585614 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Because the market is "movin on up!"

Thu, 09/16/2010 - 13:40 | 585747 t0mmyBerg
t0mmyBerg's picture

+1 That's funny

Thu, 09/16/2010 - 11:30 | 585368 TraderMark
TraderMark's picture

If you need a break in between POMO here is the latest Wall Street 2 trailer.  Special props for use of Kool Aid in opening salvo.

 

http://www.fundmymutualfund.com/2010/09/video-wall-street-2-latest-trail...

Thu, 09/16/2010 - 11:32 | 585378 Waterfallsparkles
Waterfallsparkles's picture

Think that Gold is going to have a huge correction SOON.

Why, because that is all CNBC has talked about today.  Buying Gold and how much it has gone up.  Working to get the last sucker to buy, in my opinion.

Thu, 09/16/2010 - 11:40 | 585401 LoneStarHog
LoneStarHog's picture

This is what happens when children are allowed to play with adult "sentiment tools".

Thu, 09/16/2010 - 11:41 | 585402 unwashedmass
unwashedmass's picture

 

be very, very careful with any short on gold. CNBC may be working now to preserve some shred of crediblity. they haven't covered one word about what is going on at the COMEX and how it is on the verge of a complete implosion....

seems they sold a lot more stuff short than they have the ability to deliver.

according to harvey organ's blog, (he tracks delivery demand versus actual inventories on a daily basis)...we're talking something like 1billion ounces of silver short....

that they don't have.....

so don't get cocky and rely on the old CNBC meter, cause....when this blows, it could go to the moon. those of us in the market are actually marvelling at the efforts being made to contain the situation .... both financially and in the press.

 

Thu, 09/16/2010 - 12:32 | 585546 sumo
sumo's picture

Also, word is that some big players who are new to Silver are going long and taking delivery. They see an opportunity to short squeeze JPM and HSBC and rip them new orifices.

Thu, 09/16/2010 - 12:54 | 585596 unwashedmass
unwashedmass's picture

 

well deserved. don't think you'll find ANYONE ANYWHERE IN THE MINING/METAL WORLD who is going to cry for JPM or HSBC. May their doors be shut forever.

Thu, 09/16/2010 - 11:34 | 585381 ArrestBobRubin
ArrestBobRubin's picture

Don't take those dumbass FRNs to Vegas! If gold is going to 2,000 (muahahaha) it's a way better bet. Trade 'em in for God's money before their shelf life expires!

With where things are at right now, buying some physical gold, silver, and Miner shares (see 1 month OMG charts for ATADF, AAU, SQIFF, KMKGF, TMGOF, AXU, NTGSF) even beats betting black AND red.

And unlike Vegas, what goes on in Goldland, you can actually talk about.

Unless of course your name is Blythe or Jamie.

Thu, 09/16/2010 - 23:04 | 587080 StychoKiller
StychoKiller's picture

Talk about Gold in the market all you want, just don't brag about your own holdings.

"Keep it secret, keep it safe."  -- Gandalf

Thu, 09/16/2010 - 11:34 | 585384 Robslob
Robslob's picture

Paper or physical?

: )

Thu, 09/16/2010 - 11:34 | 585385 Whats that smell
Whats that smell's picture

Good one william, cool eye chart too.

When Bush stood (with the eyes in the headlights look) beside Paulson (the hills have eyes)

I knew an eye test was needed.

Thu, 09/16/2010 - 11:41 | 585404 frankTHE COIN
frankTHE COIN's picture

" The greatest trick the devil ever pulled, was convincing the world that he did not exist "

Hopefully by Tyler exposing all this HFT stuff we can one day get a market that we remember.

Thu, 09/16/2010 - 12:11 | 585489 grunion
grunion's picture

The cat is out of the bag. I fear we will NEVER see a market that once existed in our past.

Thu, 09/16/2010 - 11:42 | 585408 fox
fox's picture

Anyone know which desk it was?

Thu, 09/16/2010 - 11:43 | 585409 unwashedmass
unwashedmass's picture

 

we have reached a level of complete insanity. there are NO buyers. take a look at DDR...look at the "volume"....they are holding this up with 200 share bids........

its scary, this one drops its going to nine if not lower. two dollar freight elevator.....

 

Thu, 09/16/2010 - 12:20 | 585516 HelluvaEngineer
HelluvaEngineer's picture

All these REITs have had parabolic blow off tops over the past week.  F anyone dumb enough to buy in.

Thu, 09/16/2010 - 11:43 | 585410 unwashedmass
unwashedmass's picture

 

we have reached a level of complete insanity. there are NO buyers. take a look at DDR...look at the "volume"....they are holding this up with 200 share bids........

its scary, this one drops its going to nine if not lower. two dollar freight elevator.....

 

Thu, 09/16/2010 - 12:00 | 585455 Thunder Dome
Thunder Dome's picture

Sick of it all...

Thu, 09/16/2010 - 13:31 | 585715 RockyRacoon
RockyRacoon's picture

Me, too.  But there are only 2 choices:  1. Stay on top of it.  2. Decouple and go dark.

Either way is uncomfortable.  I sort of like knowing who was wielding the 2X4 that hit me upside the head.

Thu, 09/16/2010 - 12:04 | 585471 BeerGoggles
BeerGoggles's picture

try arbing the Nikkei, works beautifully.

Thu, 09/16/2010 - 12:07 | 585476 Ben Graham Redux
Ben Graham Redux's picture

This reminds me of the summer of 2008 when quant funds started losing some serious capital thanks to correlations going bust.  Given that POMO is simply holding the market up, we're a few bad trades away from a bust.

Thu, 09/16/2010 - 12:11 | 585488 MichaelG
MichaelG's picture

Much more of this and that "random walk" nonsense will actually begin to apply.

Thu, 09/16/2010 - 12:14 | 585496 Caviar Emptor
Caviar Emptor's picture

Everybody's so cool and buff about this. It's a symptom of something really deep and really bad. To the big players, it signals that capital markets haven't healed at all and rather than "welcome home to normal" this signals that something wicked this way comes. 

If capital markets go  into any kind of hiccup let alone a seizure, it's bye bye economy....again.

Thu, 09/16/2010 - 13:04 | 585620 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

"something wicked this way comes".

Nicely put. Yoda could not have said it better.

Thu, 09/16/2010 - 14:16 | 585859 ThreeTrees
ThreeTrees's picture

What about Shakespeare?

Fri, 09/17/2010 - 02:41 | 586274 MichaelG
MichaelG's picture

.

Thu, 09/16/2010 - 12:37 | 585562 Rotwang
Rotwang's picture

My take:

The metal wars are still fought in the paper pits. Once they are brought out in the open, the price of ammo will change drastically.

Inflation/Deflation/Hyper: three different scenarios. The hyper (if it touches ground) will manifest in a way and at a velocity unimaginable by viewing history. There will be tweets, facebook friendings, cell calls, and all manner of rapid mobilization at the cash window. The window will be unable to dispense, or unwilling to dispense. It amounts to the same shock.

Thu, 10/07/2010 - 05:53 | 631605 Herry12
Herry12's picture

I found lots of interesting information here. I love zerohedge.
virtual server hosting
windows 2008 vps hosting
mssql hosting
windows vps server

Do NOT follow this link or you will be banned from the site!