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Guest Post: A Useful Fiction: Everybody Loves A Melt-Up Stock Market
Submitted by Charles Hugh Smith from Of Two Minds
A Useful Fiction: Everybody Loves A Melt-Up Stock Market
A sudden sharp decline in stocks may not thrill retail investors, but it would be catnip for big trading desks that used the melt-up rally to get short.
One of the more useful Wall Street fictions is the naive notion that big players and small-fry equity owners alike love low-volatility "melt-up" markets that slowly creep higher on low volume. The less attractive reality is that big trading desks find low-volatility "melt-up" markets useful for one thing: to sucker retail buyers and less-adept fund managers into an increasingly vulnerable market.
Beyond that utility, low-volatility "melt-up" markets are of little value to big trading desks for the simple reason that there is no way to outperform in markets that lack volatility. The retail crowd may love a market that slowly gains 4% for the year, barely budging for months, but such a market is anathema to big traders.
It's always useful to ask cui bono--to whose benefit? In this case, highly volatile markets don't benefit clueless retail equities owners, as they are constantly whipsawed out of "sure-thing" positions.
From the big trading desk point of view, this whipsawing provides essential liquidity, as retail traders and inept fund managers trying to follow the wild swings up and down provide buyers.
I have a funny feeling the "smart money" has built up a nice short position here and as a result the market is about to "unexpectedly" decline sharply. The ideal scenario for big trading desks here is a sudden decline that panics complacent retail traders and managers into selling (or leaving their stops in to get hit).
Then, a few days later, as the carnage deepens, presto-magico, the big traders become buyers and the sudden decline ends.
Frankly, the market is looking like it's ready for a "surprise" decline. Various sentiment indicators are suggesting massive, widespread complacency--not bullish euphoria, but bullish complacency that reflects the general belief that the European Central Bank and the Federal Reserve have "fixed" the European credit crisis, and they have the power and will to "backstop" any market decline.
The most telling evidence of this is the VIX volatility index has declined for months and reached a level that typically reflects strong bull markets and widespread confidence. Yet there is abundant evidence that the global economy has rapidly decelerated and is now contracting.
This is only one widening divergence that historic precedence suggests will be settled with violent increases in volatility and sharp "unexpected" declines.
As noted here many times in 2011, "the only trade that matters" is the DXY dollar index, as stocks have long been on a see-saw with the dollar: when the dollar rises, stocks decline, and vice versa. Yet for the past three weeks, stocks have risen along with the the dollar.
This divergence has caused many traders to start looking at currency pairs such as the euro and Australian dollar or the euro and the Japanese yen for guidance as to the next move.
Bulls would have us believe the inverse correlation between the dollar and the stock market has been broken by this 3-week long aberration. That is possible, but a 3-week move burdened by numerous massive divergences simply isn't enough to dissolve a correlation with years of history behind it.
Generally speaking, there is an inverse correlation between "risk assets" such as stocks and "risk-off" assets such as the dollar and U.S. Treasury bonds.
Analyst Tony M. discusses this in a brief entry: "There have been three large divergences between equity and credit since the late 90s and each time credit forced the hand of equity."
Another analyst, M3 Financial Analysis, posted a series of charts of the eurodollar, the dollar and the Treasury bond market. His summary: "Critical Mass approaches as financial system begins to dissolve from within..."
But Doubting Thomases have become few and far between, and those betting against the melt-up are getting lonely and tired. This is ideal set-up for a sudden crash: low volatility, widespread complacency and faith that the market can't go down because Central Planners won't allow it, and so on.
At least one trader sees a similarity to the 2008 market just before it melted down in a big way. Anyone who looks at charts will find these compelling, or at least "food for thought."
Lastly, major downgrades of European nations caused a near-invisible decline in U.S. stocks on Friday. Bulls can interpret this to mean the market is resilient and easily shrugs off bad news. Analysts such as those listed above see this as divergences being pulled ever wider, and the point at which the rubber band snaps back might come as early as Tuesday.
Before you conclude that everybody loves a low-volume melt-up market, ask cui bono of a sudden, sharp decline that pushes volatility up and panics investors who thought the era of being whipsawed had ended.
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The Doc Interviews Jim Willie: UniCredit Failure is on Tap, Euro Debt Crisis, and Gold Disconnecting from Futures Markets. So next on tap is UniCredit going bad, going bust, failing, turning to dust. And when that happens look for at least another couple Italian banks to also go bust. And when that happens look for the French banks to go bust. The three major French banks. Credit Agricole, BNP Paribas, and Societe Generale. And when that happens look for at least one or two London banks to go bust- they’re all inter-connected!
http://silverdoctors.blogspot.com/2012/01/doc-interviews-jim-willie-unicredit.html
Yeah, ok, Jim WIllie, got it.
I've read J willie for years now and he has made points that no one has. He should be a guest poster here. Just because he is a gold bug doesn't mean he is not sharp as a razor.
Greatest Economist & Politicians of all Times
1- Jim Willie CB
2- Kyle Bass
3-Rob Kirby
4- Lewrockwell
5-James Quinn
6- Ron Paul (Good Luck Sir)
7- Chris Hedges
8- John Perkins
9- Reggie Boombustbytches
10- Zero Hedge Trollersand writers
11- Sir L. Von Miser
I must have missed the memo. "Just because" Why are gold bugs so clueless, again?
They are all backstopped by the ECB. Nobody bank in Europe can fail at this point.
So what you are saying is they will need to print more euros....
European Banks Deposit Entire LTRO:
http://www.zerohedge.com/news/european-banks-deposit-entire-ltro-and-then-some-ecb-deposits-approach-%E2%82%AC500-billion
The ECB is looking at the Keynesian abyss: the liquidity trap whereby new cash injections are hoarded back to the central banks. When this becomes more and more acknowledged, the only way out is by a slow and paingul deleverage.
http://journey-to-alpha.blogspot.com/2012/01/ltro-liquidity-tsunami-floods-back-to.html
They won't ever deleveage. The debt must stay on the books because there is no demand for it otherwise. So then cash is needed to preserve the balance sheet.
The more debt, the more cash. This will go on.
My question is- when do these bloated balance sheets devalue the currency on a massive scale? When does the euro collapse?
The primary use for the LTRO is to backstop bank funding. Avoid a situation where there’s a Bear-Sterns like run on the banks. Banks are going to use it to replace current funding once it matures. That’s why you’re seeing it deposited with the ECB. It’s insurance money for the banks.
Some of it is also slipping into short-term sovereign funding. Overall, it’s a pretty big success. LTRO reversed the liquidity crunch for both banks and sovereigns.
Same as it ever was, I guess. Seems plausible.
Key news summary for 16 Jan 2012
http://fnn24.com/?p=38737
OT... BDIY still doing a face-plant. Interesting to see if it goes sub-1000,
When it goes. Probably Wednesday but maybe tomorrow.
WOW!
I agree.
Dollarsup-Stocksup makes no fukkin sense to me either. The only thing making sense is that prior beliefs must be dspatched with all due respect to the invisible hand.
A snip from Mark Lundeen's latest post at Lemetropolecafe.
=====
But after the high-tech top in 2000 in the chart below, the 100 year market relationship between the Dow Jones and trading volume inverted! For the past eleven years (chart below), we have seen the Dow Jones * decline * on expanding trading volume, and the Dow Jones now * advances * as trading volume stagnates, or actually contracts. How could that be explained?
I’ll tell you how, the Federal government is using inflationary funding from the Federal Reserve, which is diverted to the big banks, to prop up valuations in the stock market when the financial markets are in a decline. Small wonder the Dow Jones is having problems with taking out its highs of October 2007, or even making a new credit-crisis high; the rising volume we’ve seen since 2000 isn’t from bullish sentiment in the market, rather it’s due to “market management” as a covert official “policy” to avert economic crisis. The “policy makers” goal is not to reignite the bull market, but to sooth the frayed nerves of voters when the major indexes decline.
That is quite a theory Mark; accusing the US government of conspiracy in a giant market manipulation scheme, and the New York banking establishment of trading on insider information. Well, all I know is what I hear on TV, and on 17 September 2001, George Stephanopoulos said the following on Good Morning America.
"Well, what I just want to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets...perhaps most important, there's been--the Fed in 1989 created what is called a plunge protection team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there--they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have, in the past, acted more formally"
- George Stephanopoulos, former Clinton adviser September 17, 2001 on ABC Good Morning America
Now George may have broken this news in September 2001, but if you go back and look at my last chart above, it’s very obvious that the price fixing scheme he informed the public of, actually began twenty months before in January 2000. And the “Plunge Protection Team”, * as Mr Stephanopoulos called them * has continued managing price declines in the stock market ever since. Geeze Louise, the April to August decline in the Dow Jones did so on an up-spike in trading volume, and after the Dow Jones was once again managed upwards, trading volume once again declined.
How long will this fraud last? I don’t know, except that it certainly can’t go on forever. Since before the October 2007 top, I’ve been predicting that the stock market was going to see another Great Depression era decline as a result of intrusive market “policies” by the best and brightest in government, banking and academia. One thing for sure, thanks to the inflationary “monetary policies” of the managers of the World’s reserve currency, America’s financial markets no longer serve as a price discovery mechanism, but as tools for manipulating the price of financial assets for political purposes. When the rig on the stock market finally falls apart, the lows of March 2009 will be taken out pretty damn quickly.
And all it will take for the MSM to set this plunge off will be Merkle discovering a fly in her soup.
I hope she swallows that fly.
know and old lady
Who swallowed a bird
Isn't that ubsurd
To swallow a bird?
She swallowed the bird
To catch the spider
Who wiggled and jiggled
And tickled inside her
She swallowed the spider
To catch the fly
But I don't know why
She swallowed a fly
- I guess she'll die
But Charles, the downgrades and Greek default are priced in?
Liquidity conditions in Europe are getting better. The Meltup is very much warranted. We’ll see how earnings come. If they’re better than expected, we could get another 10%.
You forgot the "/sarc" there, Roboroy....
you don't know the game? hah. earnings beat estimates at 85%. doesn't matter the % lower than previous or where the earnings came from. roy10 - you were a lucky boy. if i got 15% correct during my school years - i would have failed and gotten my bottom tanned. these analysts at w.s. banks miss 15% correct and get huge bonuses. figured it out yet?
I love that VIX chart. Bad news happens instantly, then everyone settles down slowly over time, until the next spike hits. Fast attack, long decay - like the waveform of a snare drum with reverb on it.
Lull the sheep into slumber, and jump in and shear them.
Dang it, McCoy. Now I have to google the waveform of a snare drum with reverb on it.
I don't know Guest Post, the "smart money" didn't seem to perform too well in last year's volatile market. I'm thinking of Paulson and the big investment banks! I think the so called smart money is not these guys, but probably the senators who are not so much smart as they are INSIDERS...
Everytime I see mr Smith's "selloff imminent" call I cover/reverse long. Saved me a lot of money and headaches.
Slave Labor for Wall Street (who is lobbying for tougher sentencing guide lines! WOW!! Privatized Prisons are a SURE THING!! 1/3 of YOUR Appliances in YOUR Home were made by Prison / Slave Labor!)
Authoritarian Capitalism - The American Prison System
http://www.youtube.com/watch?v=1iMFd0zDAW0&list=FLbRZZAixeFXZfqszvKisEdQ&index=1&feature=plpp_video
The name of this one may throw you.. but please.. share it with the Younger members of YOUR Family!! and hope that it sticks with them! Kill two birds with one stone! but the Facts provided are with the 6 minutes of your time.. and you may (as I have) find this to be one of the better put together video's on the Facts or lack thereof.
Jersey Shore's Snooki speaks out on 911 Truth
http://www.youtube.com/watch?v=mXmz4qTQZEk&feature=BFa&list=FLbRZZAixeFXZfqszvKisEdQ&lf=plpp_video
Let us all this year try to make more information available to more people.. in formats that are appealing to those people.. instead of it being about how smart we are v how dumb they are.. let us all try to reach them in a way that helps them understand and retain the Facts provided.
if we are so smart.. how come we have not figured out a way to reach everyone? we should be able to do this if we could stop being ego maniacs for just a little while.. we can feed our ego's and help educate the World.. without breaking a sweat, if we are so smart?
God Bless You!
God Bless America!
signed, Christian Constitutionalist
While CHS and other analysts plot the second derrivative of the VIX, the divergences of currency futures pairs, etc., RobotTrader is posting photos of bikini babes, and just buying or holding stocks, and laughing all of the way to the beach. What is so hard to understand about loose money policy, that encourages and rewards financial asset buying? This "market manipulation" is the least secret conspiracy in the history of the world, and it is widely advertised to continue for the foreseeable futue and beyond. Get with the program, CH Smith!
Funny how people forget so quickly last falls 1,000+ point insta-plunge.
Lulled right back into dreamland...works every time I guess.
Robo 'buys and holds stocks' on an Etch'a'Sketch, dont pay him too much mind. BTW Robo's last hard 'Im all in here' call was at DOW 12,700 so careful what youre believing from that clown.
I think you are missing the point. The indecies were flat last year. The money was made pumping and dumping stocks. Yes, some stocks went up, but this is because as the fiat currencie loses value stocks get more expensive. In real terms, stocks were down last year.
As far as the VIX, Smith makes a great point: it lulls the retail investor to sleep and the big money pounces on that and shorts them.
too rich to care is WRONG. the banks made money on the vol. the retail investor that bought the lie 'hold long term' got zero. zero. and the retail investor that tryed to trade in and out got fcked because he bought in at the run up and missed the sale days. that's the game baby. the casino is rigged. wanna throw some dice?
I think he's upset like me that TPTB are selling the future to buy the present, and we're talking lives not just money.
That is Keynesian monetary policy 101.
Further back than that. Something about Cain and a mess of pottage ...
Just remember that cruise ships with failsafe electronics do sink.
But...but...that rock wasn't on the chart! The computer didn't tell me it was dangerous! Why didn't "Siri" warn me?
Siri would have warned them, as there's an app for that
you can be pretty sure the easy melt up market has the support of POTUS and the Fed. a hedge fund manager may own 1000 shares of xyz and the market can levitate the value of his holdings on margin and no one takes profit until the bell rings. then the market participants furiously take as much of the easy profits as possible, (or they try to hedge their losses) and hopefully its not a zero sum game.
the real question is when does the bell ring? market myth one, volume is the weapon of the bull, market myth two, they don't ring a bell at the top. if they didn't ring a bell at the top then what's the point? those profits have to be actualized! with the full support of government.
myth three. when inside traders are caught they go to jail (Martha Stewart acts on inside information). when the big hedge funds act on information leaked from the Fed, they get rich.
myth four. the market is a level playing field. do you ever wonder what happened to day traders?
myth five. one political party or the other, wants to legislate wealth redistribution. The wealthy in America do not exist as a permanent class, as fortunes are made and lost, the faces change from time to time. If a corporate advantage does not produce a corporate product or service, that scarcely matters. Goldman Sachs has FDIC insurance.
I do not believe that smart money (if paper money can ever be "smart") is short right now. The markets simply get used to the new status quo.
Where else to invest, if the big players don't want to build a vault and hire security guards?
Exactly, when most people believe a further melt up is in the bag... its 'the new normal' and the 'new status quo' or whatever...time to pull back. No point to a pump without a dump, just remember back 6 months ago last time everyone thought we're all up from here at DOW 12,700 we got 500 point down days in a row.
I dont really like Charles too much myself but hes right about this. No benefit to the big players with a boring slow melt up market, no point to it, time to shake and bake a bit.
Market wide conclusion is again 'nothing bad can happen from here on out...we'll just be adding 100 or so DOW points daily for years'...wow spooky.
there's a good art over at 321gold, about how DOW 36000 is really a wealth extracting result. and just to assuage those who scream about the 1%, they lose traction as well in that event. in broad macro terms its all a function of introducing new currency via credit into the system and all of us paying seignorage, compounded by the length of time it takes the real economy to catch up with the new money supply.
The market could go down a thousand points in a week or a day, it also could you up to...the markets are broken, nothing left but bots...trading no liquidity nothing the markets just awaits ruin...i think a up 1000pts..then down 2000 day should do it..
National debt to $20 Trillion by next year but it's o.k., death, taxes, and inflation will take care of it.
Citi and BAC looking really cheap here.
Just be careful on Citi and BAC. They're worth a flutter though, but I cannot justify investing in BAC.
The only problem with these conspiratorial posts about how "the market is rigged" and how we're due for a "surprise" selloff, a selloff which is actually engineered for the benefit of the short positions held by major players...the only problem with all of that is that....when you see the absolutely piss-poor results being posted by these "major players" you very quickly realise that they don't actually control diddly squat, and that quite often their massive bets totally suck.
If the markets really truly were the play-thing of these mega-players, wouldn't the mega players be posting surprisingly awesome performance results? If ever there was proof that in reality actually NOBODY has a frikkin clue and NOB)DY controls anything, it would be the seeming inability of any of these market gods to actually make any real true money. All they seem to do is make money thru their 2% AUM mgmt fee. And if we've learned anything in the last 5 years it's that the vast vast majority of alpha generators are actually merely delivering highly-leveraged active Beta, with an alpha price tag. Sure, there are some true geniuses out there who actually do have an edge...and a sustainable edge at that...but really, this idea that there's a master puppeteer out there controlling the markets...I don't buy it. Pretty much ALL of the big banks, the big asset management firms, the hedge funds, they're all about as clueless as we are...and as clueless as the central bankers are (the ones who supposedly control everything, and yet, couldn't see the bursting of the dot com bubble coming, nor the bursting of the housing bubble, nor the bursting of the sovereign debt bubble).
Basically...we all suck.
The money managers don't care about their banks stock price! They just want their bonuses.
This is a pretty smart post. Monetary policy can be "rigged" but an entity as big as the stock market, with so many multivariant inputs, simply can't. HFTs can skim, but only as a function of speed, not intelligence or manipulation.
too rich - agree and disagree. to a large degree it's greed. right now, they (the big bank computers) are the only ones playing the us stock markets with robots - flipping back and forth. but even intra-day - who gets the chips off the table. housing bubble. they all knew. stanley o'neal at ml checked out with 160 million. mozilla checked out with 200 million. greenberg, fuld, cayne didn't get the chips off fast enough and apparently got burnt. dimon and blankfein did ok also. it's just a big casino game and the retail investors aren't players.
What happens when there's NO solid foundation...
Credit forces the hand of equity. Bitchez.
if retail is responsible for such a small % of the volume why do the big desks really need to sucker them back in?? There's no shortage of posts/articles here that tell us how insignificant retail is to the market but we also frequently hear/read that institutional money & big banks are just drawing the retail sheep in to be butchered. Data points to retail moving out of shares not in..
My guess: Retail Investors serve the function of gambling shills, making the market look like there's legitimate activity going on...
Anyone have a guess when the next US downgrade occurs because that will be the day the shtf.
us downgrade priced in. doesn't mean anything. where else would you take your money. and with obama at the helm?
sarcasm on. but - it just doesn't make any sense to me either. markets up. shorts not allowed.
I plan on selling before it goes down. :p
give me a break, give me a break, give me a break off that kit kat bar
The only logical reason why the market is going up despite everything staying rotten is either the central banks are secretly supporting the market wih newly created money or the economy has bottomed and the smart money knew it.
Everybody loves inflation, I guess.
"food for thought"...gorging myself!
My Main Man...No doubt about it!!
I have read many articles down there about the retail traders, anyone who is trading in the NYSE is a retail mostly!
You have to know that big players of money they dont trade stocks as much as they trade Futures and Bonds! so if you ever wonder how you money got fucked, or why the market is crashing, then pay an eye on what the future traders are doing.
and remember
"Take off is optional, Landing is a must"
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