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Don't Believe The Rally?

Leo Kolivakis's picture





 

Via Pension Pulse.

I wanted to follow-up on my previous post where Leo de Bever articulated his fears on what will happen when the music stops. Joe Saluzzi, co-founder of Themis Trading, was interviewed on Yahoo Tech Ticker on Monday (see video below):

Major averages are hovering near their highest levels since September 2008, but retail investors continue to flee the market.

 

Domestic equity funds have suffered outflows for 24 consecutive weeks through Friday, and over $81 billion has come out of domestic equity mutual funds year to date, according to Morningstar.

 

At the risk of stating the obvious, several factors explain why investors simply don't trust the rally.

 

Twice bitten, thrice shy:
Having been burned by the bursting of the tech stock bubble in 2000,
the housing bubble and the financial crisis of 2008, investors are
understandably wary of getting sucked in again. A "lost decade" for
index investors hasn't helped either.

 

It's the Economy Stupid:
With the "real" unemployment rate near 17%, millions of Americans
simply have no money to put into the market; many are cashing out their
401(k) plans and otherwise raiding their nest eggs in an effort to stay
afloat.

Given the economic backdrop, it's no surprise many investors see the rally as being detached from reality and due only to the Fed's easy money policies...and the promise of more!

 

"We're
not seeing any sort of growth other than stimulus," says Joseph
Saluzzi, co-founder of Themis Trading. "That is a very disturbing thing
-- the constant stimulus that keeps on coming that really does nothing
other than barely keep you above [breakeven] on the GDP print."

 

In
addition, Saluzzi says investors are rightfully worried about a market
dominated by "high-speed guys just chasing each other up and down the
price ladder."

 

Unsafe at High Speeds

 

As has been widely reported, high-frequency trading routinely accounts for more than 50% of daily U.S. equity trading volume and regularly approaches 70%.

Saluzzi
isn't opposed to high-frequency trading per se, calling it a
"byproduct of the market structure," as detailed in the accompanying
video. But he believes that structure is broken, thanks to rules
promoting computer-driven trading, most notably Reg NMS.

 

As
a result of regulatory changes and new technology, events like the May
6 ‘flash crash' "will happen again," he says. "There's not a doubt in
my mind."

 

Many retail investors feel the same way, another
reason for the mistrust of the rally and why about $65 billion of the
equity fund outflows this year have occurred in the five months since
the "flash crash".

So are high frequency trading
(HFT) platforms accounting for 70% of the daily trading volume? I'm not
sure if it's that high but I have no doubt that today's stock market is
primarily driven by multi-million dollar computers developed by large
hedge funds and big banks' prop desks.

And what's the best way
to beat high frequency trading? Take a long-run view on a stock, a
sector, or an asset class. You're never going to beat the computers day
trading but you can make money in these markets by understanding the
weakness of these HFT platforms. For example, if you hold shares of a
solid company and the price plunges on high volume for no real valid
reason, chances are some HFT is going on in that company. My advice is
to add to your positions on those dips and just hold on. If you get
cute, placing tight stop losses, you're going get burned. Just like
anything else, computers have advantages and disadvantages.

[Note:
Keep an eye on Citigroup (C), a favorite target of HFTs, and Research
in Motion (RIMM). Both stocks are primed to break out from these levels.
I prefer RIMM.]

What worries me more is what Saluzzi says on
how volatility is impacting the IPO market. But the facts don't back up
his claims. In fact, according to Renaissance Capital, $23 billion was
raised in the global IPO market last week, making it the biggest week this year and signaling a revival in investor interest for this class of equities:

 

The Hong Kong offering of AIA, a carveout of AIG's Asia Pacific life-insurance business, raised $17.8 billion, making it the fifth-largest IPO
on record. Also Taiwan's TPK Holdings has a $200 million IPO; the firm
is the supplier of the touch-screen technology behind Apple's iPad.

 

In early November, Coal India IPO is set to raise more than $3 billion
in what may be the country's largest-ever initial public offering.

 

In the U.S., handbag-maker Vera Bradley (VRA), Chinese education
provider TAL Education (XRS) and Italian restaurant chain Bravo Brio
(BBRG) raised a combined $440 million, while in South America, oil and
gas provider HRT Participações sold $1.4 billion in new stock on
Thursday.

 

Norway’s Statoil Fuel & Retail raised $800
million after pricing at the top of the range Thursday. Andthe world's
largest online betting exchange, London-based Betfair, made its public
debut by raising $540 million.

 

The
average 2010 IPO has returned 6.3% from its first day close to date,
outpacing the 4.8% year-to-date return of the MSCI World Index (IWRD),
says Renaissance.

 

“Heavy, deal flow, positive returns
and a swelling IPO pipeline suggest an active close to an already
active year, and an IPO market that has finally returned to more
normalized issuance levels,” the company said in an online blog.

As for the economy, don't just focus on the US. CPB Netherlands Bureau for Economic Policy Analysis released its world trade report on Monday, showing world trade up 1.5% month-on-month in August and world industrial production up 0.2%:

Compared to its long run average, production momentum remains high in July, particularly in the United States, the Euro Area, and emerging Asia.

There
is a lot of slack in the US economy, but things are slowly shifting. As
for the rally, there is plenty of liquidity to propel shares much
higher. While I understand asset managers who are skeptical, I fear they
will be left in the dust when the markets start going parabolic. And
whether or not you believe in the rally, it's irrelevant. What is
relevant is how long can you afford to underperform the markets before
you lose your job?

 


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Thu, 11/18/2010 - 03:39 | Link to Comment meichou
meichou's picture

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Tue, 10/26/2010 - 07:37 | Link to Comment fredquimby
fredquimby's picture

I just loaded up on more silver/usd warrants last night...before all the monthly paychecks hit the market today, tomorrow and Thursday....

4w:1oz @ $0.24/warrant with strike @ $24.50 on December 17th 2010....so Go silver Go!!

But I can't help feeling that EVERYONE seems to be sooooo sure that silver/gold is going up, that it makes me nervous....thank goodness for those seriously cheap under 21 puts I picked up for 0.08 a warrant last week just in case :)

And as for Leo......keep at it Leo! I love it how people get so steamed up when your pov is different to theirs...haha - Cheers!!

 

 

 

Tue, 10/26/2010 - 06:14 | Link to Comment BigDuke6
BigDuke6's picture

I dunno why people bag out Leo - if i'd believed his rally stuff i'd be many grand better off.

Maybe thats what cheeses off the cheese-dicks.

How far will the bernanke 'put' go, Leo?

Tue, 10/26/2010 - 05:24 | Link to Comment scratch_and_sniff
scratch_and_sniff's picture

Joe is right, HFT's don't front run us because we are not they're clients. The exchanges do all the front running, technically. We pay for a service, and then they release information about us and what we are doing, for a fee.

Tue, 10/26/2010 - 05:03 | Link to Comment Azannoth
Azannoth's picture

The only thing you can Buy&Hold is physical PMs  imho

Tue, 10/26/2010 - 03:57 | Link to Comment TraderTimm
TraderTimm's picture

i can't wait until the US market becomes the vacuous ping-pong playing field it deserves to be. HFT, you win - trade with each other you mother fuckers, until even the 'rebates' don't keep you afloat.

Cannibals, cannibals everywhere - and not a single human trader to hook your claws into. That is what you deserve you frickin' quant-driven market-destroying retards.

Tue, 10/26/2010 - 04:26 | Link to Comment Pondmaster
Pondmaster's picture

Do I detect a loss yesterday ?

Tue, 10/26/2010 - 03:34 | Link to Comment gwar5
gwar5's picture

I'm only getting into the market when insider selling hits 10,000: 1.  That's when I know I've cleared out all the suckers.

Tue, 10/26/2010 - 03:01 | Link to Comment badgerman67
badgerman67's picture

Its all about demographics in the US.  Expect mutual fund outflows to continue as the baby boomer retail investor probably views the Japanese outcome as an upside scenario. Not having the stomach, the savings rate, and/or perhaps even life expectancy to live through another collapse in equity prices they will continue to go conservative.

Asia has gone full retard with the fixed investment.  Chinas fixed investment is what percent of GDP?  60%+.  Its everywhere.  Singapore with building boom subsidized by their 1.2% 3 year mortgages!  Thailand adding 30% to existing hotel inventory by 2012.  This is in the face of current 40% occupany rates, poltical instability, and a strengthening baht.

At the end of the day you just Buy the Chinese Solar Cos.  It has to end well for those guys. 

Tue, 10/26/2010 - 02:03 | Link to Comment GoldmanSux
GoldmanSux's picture

Portfolio managers are the new retail investors, as the last 10 years has proven.

Tue, 10/26/2010 - 00:57 | Link to Comment TheMonetaryRed
TheMonetaryRed's picture

Dear Traders, 

68% of FX volume, 53% of Stock Index volume, 44% of Interest Rate volume, 34% of Energy volume and 26% of Metals volume - all courtesy of our friendly, colocated algos here at the CME. 

You're welcome.

 

Love,

Team Atari 

 

P.S. - All your message traffic are belong to us.

Tue, 10/26/2010 - 01:35 | Link to Comment Bear
Bear's picture

Where did you come up with these numbers? Can you point me to a source ... it seems like a great set of numbers to monitor.

Tue, 10/26/2010 - 03:27 | Link to Comment TheMonetaryRed
TheMonetaryRed's picture

Dear Bear, 

Overall, 46% of CME ATS volume, 66% of message traffic are belong to our algos. 

Possible being special interest to you is 30% of volume, 66% of message traffic in gold options market for us. 

Your gold market are so small and delicious. 

 

Love, 

Team Atari. 

 

P.S. - We win. 

P.P.S. - www.cmegroup.com/education/files/Algo-Trading-Update.pdf

Tue, 10/26/2010 - 00:51 | Link to Comment twittering as s...
twittering as stocktradr's picture

"But what's the best way to beat high frequency trading?"

"You're never going to beat the computers day trading but you can make money in these markets by understanding the weakness of these HFT platforms."

"My advice is to add to your positions on those dips and just hold on."

"If you get cute, placing tight stop losses, you're going get burned."

"Just like anything else, computers have advantages and disadvantages."

"What worries me more is what Saluzzi says on how volatility is impacting the IPO market. But the facts don't back up his claims."

"In fact, according to Renaissance Capital, $23 billion was raised in the global IPO market last week, making it the biggest week this year and signaling a revival in investor interest for this class of equities:"

"As for the economy, don't just focus on the US. CPB Netherlands Bureau for Economic Policy Analysis released its world trade report on Monday, showing world trade up 1.5% month-on-month in August and world industrial production up 0.2%:"

"There is a lot of slack in the US economy, but things are slowly shifting."

"As for the rally, there is plenty of liquidity to propel shares much higher."

"While I understand asset managers who are skeptical, I fear they will be left in the dust when the markets start going parabolic."

"And whether or not you believe in the rally, it's irrelevant. What is relevant is how long can you afford to underperform the markets before you lose your job?"

sound like statements and advice from a talking head on one of those tv financial shows.

what does: the fed, Bernake, the US dollar, economic data, high frequency trading, "beat the computers," "understanding the weakness of these HFT platforms,"  "volatility," "the facts," " what Saluzzi says,"  "according to Renaissance Capital," "world trade up 1.5% month-on-month in August," "slack in the US economy," "plenty of liquidity," " going parabolic," ..., have to do with a trader making money?

answer: "... it's irrelevant."
 
"What is relevant is" knowing how to trade.

a trader trading a complete trading plan continuously makes more money than one loses under any market conditions.

twittering as stocktradr

Tue, 10/26/2010 - 00:38 | Link to Comment Chris88
Chris88's picture

Why do they still let this imbecile write articles for this site?

Tue, 10/26/2010 - 02:26 | Link to Comment russki standart
russki standart's picture
Be nice. I may not agree but at least Leo provides a counterbalance to the relenting negativity that pervades ZH. If nothing else, his comments compel me to review my current views. Like it or not, the S&P is  well above where I expected it  to be 6 months ago
Tue, 10/26/2010 - 01:12 | Link to Comment Bear
Bear's picture

Come on Chris ... We love Leo ... we need to be challenged at every point to stay vigilant. If we just hear what we want to hear (even though it may be the truth), we miss the opportunity to think through our positions carefully.  

Tue, 10/26/2010 - 00:37 | Link to Comment cocoablini
cocoablini's picture

Governments, banks and players all get to trade in their worthless trash for cash. We all think that there is a real profit motive in the stock market now, but there isn't. The stock market is operating like USGovernment. That is to say, there isn't a profit motive and " investors" can continue to lose money because there is an endless pool of taxpayer trash to pull from. If I could trade in a polished turd for cash( agency debt, MBS, treasuries) then I would do anything the cash provider told me to do. Primaries are asked to buy the stock market after POMO because holding Apple is better than holding crap. Even if apple loses a 100 bucks a share, it's better than Zero, which is what their old assets are worth. Until the FED and US government threatens bonuses, salaries and assets the banks will do whatever it takes to keep the pyramid scheme from inversion. So yes, the stock market is going to 20,000 DOW because that's the easiest asset to control now.

Tue, 10/26/2010 - 00:30 | Link to Comment Hugh_Jorgan
Hugh_Jorgan's picture

I'm bullish on the "4Gs" asset class over the next 24 - 48 mos. Gold, Guns, God and Grub. IMHO, any balanced portfolio will include a sizable investment in each.

Or, you could dump eveything into the perpetual upward spiral of Apple, Netfix and Amazon? Man, these f-ing stocks are on fire! Sweet!

<gape><drool>

Mon, 10/25/2010 - 23:58 | Link to Comment Buttcathead
Buttcathead's picture

 There is a lot of slack in the US economy, but things are slowly shifting.  LOL  they are shifting...  into reverse.  what a dumb ass

Tue, 10/26/2010 - 00:20 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Keep driving forward looking in your rear view mirror! LOL!

Mon, 10/25/2010 - 23:55 | Link to Comment RobotTrader
RobotTrader's picture

The fact that the market is going up in the face of such horrid fundmentals and constant outflows can only be interpreted as bullish.

imho....

Tue, 10/26/2010 - 04:12 | Link to Comment Pondmaster
Pondmaster's picture

"And.. you can always stay out of the market.  $80B outflows and huge insider selling - seems tremendously unsteady."

And yet it is being said that bullish indicators are all high .. so who's bullish ? The algorithms ?

I prefer an averaged  NYSE Hi/Lo ratio and Adv/ Dec ratio  - lots o noise from the talkers - technicals are everything .

 

Tue, 10/26/2010 - 01:31 | Link to Comment Bear
Bear's picture

There is no bigger bear on this site, but I am wondering just what might happen if SP advances above 1210? I watch the market 12 hours a day and I have for 10 years and I have never seen such resiliency. Each piece of bad news today would have created an avalanche in yesteryear. And any good news is usually bogus. Can you imagine 'Forclosuregate' five years ago?

But never before have so many dollars been pumped into the market at just the right time. On April 26, SPY rose to 122.12 when it looked like a recovery could actually be in the making. A lot has happened since then and market players sentiment is decidedly more negative, so if we come back to this level a logical conclusion one can draw is that the rally may continue.

With every stock and most commodities in lock step with ES, the next correction will probably be just that ... a correction with major volatility. The best play is buy VXX at 10.80 when SPY hits 121.50 

Mon, 10/25/2010 - 23:34 | Link to Comment MGA_1
MGA_1's picture

And.. you can always stay out of the market.  $80B outflows and huge insider selling - seems tremendously unsteady.

Mon, 10/25/2010 - 23:12 | Link to Comment Peak Everything
Peak Everything's picture

I get how the fed does stealth monetization but its still not clear in my mind how they channel free money into propping the market. Would someone please be kind enough to explain this flow in a couple sentences?

Tue, 10/26/2010 - 03:05 | Link to Comment blunderdog
blunderdog's picture

Zero interest rate short-term lending rate means big banks can gamble on someone else's dime at no cost.  If someone (or someTHING) thinks there's a penny or two to made on a trade and just happens to have a few million in "liquidity" sitting around, there's a good chance to capitalize on a bit more money currently invested by any carbon-based traders.

This "feature" of the current market environment wouldn't be inherently bullish, though.  It could go either way.

Mon, 10/25/2010 - 23:36 | Link to Comment MGA_1
MGA_1's picture

There are articles on the ZH discussing this issue, but seems to resolve around POMO.  The fed buys treasuries from the primary dealers (JPM, goldman, etc.) who then put the money into the market.

Mon, 10/25/2010 - 23:11 | Link to Comment traderjoe
traderjoe's picture

Leo, the choice of selective metrics. Trade was up, from a downwardly revised 1.0% decline the month before. 'Momentum' is slowing. And are these inflation-adjusted? Peddle your "recovery" somewhere else...

From your quoted report:

Based on preliminary data, in August world trade volume was up by 1.5% from the previous month, following a downwardly revised decrease of 1.0% in July. In most parts of the world, import volumes rose significantly. On the export side, emerging economies outperformed advanced economies, the Euro Area being the only one of three major blocks to achieve positive export growth. In Japan, both import and export volume declined substantially.

Monthly trade figures are volatile and focus on ‘momentum’ is therefore preferable.1 At 1.9%, momentum remains positive in August. It has been gradually decreasing since January 2010 however.

 

 

Tue, 10/26/2010 - 00:19 | Link to Comment sushi
sushi's picture

What is interesting are the comments to a prior ZH story (Oct 24th??) on domestic inflation. All the comments described reduced package size / quantity plus a price increase. And this attempt to maintain margins is taking place before any big jump in commodity prices.

 

So what happens when we do see a rise in input prices?

Mon, 10/25/2010 - 23:02 | Link to Comment Jake3463
Jake3463's picture

You have to pick an asset class to go into, Bernake is going to destroy the US dollar if you don't so your choice is to go out and buy paper after the bankers have pumped it up and are looking for the fool to buy it from the or to hold cash and watch the value of that hit the shitter.

 

 

Mon, 10/25/2010 - 23:14 | Link to Comment MarketTruth
MarketTruth's picture

Speaking of Bernanke, remember ZH'ers he said he will keep the stock market propped up at all costs. The Bernanke PUT is 'baked in the cake'.

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