NASDAQ

No surprise: blame the US government on the information black out. Shareholders, and the investing public of course, learn last. Our question: when did clients learn?

Over the years we have not spared our praise for the Nasdaq: the one exchange to first legalize frontrunning aka Flash Trading, to actively promote churning via HFT erection-inducing liquidity rebates in stocks and options, to create novel and ingenious ways to skirt Rule 611, and, most recently, to overtake the NYSE as host for greatest number of fraudulent Chinese reverse-mergers, the Nasdaq has never kept a secret that it cares far more about its clients than the investing public. Yet little did we know that in addition to pervasive manipulation we can also add thorough security breach and compromise to the exchange's list of transgressions. According to the WSJ, "Hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year, and federal investigators are trying to identify the perpetrators and their purpose, according to people familiar with the matter." Now it is sadly ironic that the world's "electronic exchange" (whatever that means in a world devoid of any carbon-based traders) is the one that would succumb to an outside incursion. What, however, is punishable by even the most mentally retarded, transvestite midget porn-obsessed SEC minion, is that US investors have to learn that practically any stock transaction in the recent past may have been frontrun by illegal means (as opposed to just legal ones that are available to any one with a few Mahwah collocated Cisco machines), through a newspaper.

Jim Rogers, in his latest interview, cuts right to the chase: "I don't own many equities, because I don't know what is going to happen in the world economy. I expect more currency turmoil, more social unrest, more governments collapsing. So I am investing in currencies and commodities rather than stocks." Pretty much like everyone else, as we have been suggesting for quite a while. Rogers snaps at the trademark CNBC question of what he would be investing in: "I have been explaining to everybody on CNBC for a year and half or two now that food prices are going to go through the roof, they're going to explode. We have serious shortage of everything developing, including shortages of farmers... The average age of farmers in one major agricultural state is 58 years old. In 10 years it will be 68 years old. In parts of Japan they have no farmers... It takes 7 years for a coffee tree to mature. Orange trees, palm trees: you don't just suddenly snap your fingers and suddenly get some more palm oil. All of this takes time." So all those who believe that the surge in people rushing to fill the ag arbitrage holes will produce immediate results, may need to wait 3-7 years, dependant on access to manure.

Something odd is going on with the market today: the NASDAQ has, for reasons unknown, halted disseminations and while we are trying to figure out what the reason for this odd market moving event is, confirmed by major sustained negative ticlks, we are looking at the one stock that is more indicative of the Nasdaq (with a 20% weighting) than any other company: Apple. Judging by the chart, there are some very peculiar technicals in process. Just like Greek rioting prompted the flash crash, will today's Egyptian televised attempt at revolution force the Nasdaq to impose a market wide circuit breaker?

Even as the S&P closed modestly positive, there is yet another indicator added to all the other "massively overbought" technical signs we have discussed recently: namely the cumulative TICK. As can be seen on the charts below, both the S&P and the Nasdaq's cumulative TICK readings closed at the lows of the past several days, despite the fact that stocks once again rose to 2010 highs, while the Nasdaq hit 3 year high levels. For those who need a quick refresher course on what the TICK indicator shows, here is a great rehash by Brett Steenbarger. So how does explain this very apparent divergence between underlying buying, or as the case may be, selling pressure, and actual price dynamics? We wish we could tell you. At this point, with no volume, little volatility, stock markets are increasingly the plaything of those who continue to dabble in vol and other Greek letters. It is merely another indication that contrary to actual bid/offer interest, the market continues to do what the marginal market maker decides. In a normal world, we would claim there is some risk for a substantial reversion to the mean. However, for that to happen it would require at least some participation by trading interests which are not aligned with that of the Fed. And at last check, and following an endless equity fund stream of outflows, such did not exist.

Out of nowhere, a late day selloff in high beta tech names ends the Nasdaq's 8 day winning rally, and causes a red close to the tech index which as we presented over the weekend, has the highest bull/bear ratio since the dot com days. Various rumors are swirling to explain this stunning event, among which one of the more provocative ones is that the universe of Rentec alphaclones (namely the moderate money momos, which have recently taken over the market, and which mimic Rentec RIEF B public holdings, which many believe are broadly indicative of Medallion's portfolio) is slowly starting to pocket year end profits, comparable to the action in gold last week, when gold sold off after a couple of macro funds closed out gold positions at massive profits. Is the now extinct process of profit taking about to reemerge from the ashes? On the other hand, this could merely be a brief respite to what has become the most ridiculous tech-driven momo market in many current traders' lifetimes.

And for another confirmation that the Nasdaq is now at the same extreme "irrational exuberance" levels last seen during the dot com crash, we read courtesy of sentimenttrader.com that the Rydex Nasdaq 100 bull/bear ratio is now the highest it has been since just before the dot com crash. "Traders in the Rydex mutual fund family have poured into the Nasdaq 100 long fund at the expense of the inverse fund on the same index. These traders now have 34 times more money invested in the long fund vs. the inverse fund, which is the highest ratio since the bubble days of 2000 and early 2001." And what is scarier, is that unlike during the dot com, investors are using leveraged methods to express their exuberance: "The Bull / Bear Ratio for the leveraged funds isn't quite as extreme...but it's close (on a relative basis)."

Mary Ann Bartels, BofA's technical research analyst looks at the NDX large spec positions reported in last week's COT report, and does not like what she sees: "Large speculators aggressively bought NDX futures last week to a net long of $3.2bn notional from $0.8bn notional previously. Readings are in a crowded long. Between mid Feb and early April of 2010, HFs accumulated NDX aggressively into a crowded long position and S&P 500 went up 7.9% for this time period. The market corrected 10.2% from the peak crowded readings in the NDX in later April and May. We are estimating a market pullback of 10%-12%."

Now that the PGN crash is done and over with, we decided to look at just what shares the NASDAQ decided to DK (in other words deem invalid), and which would stay. Assuming a fair and efficient market would mean all trades should stay, and the algos that were pushing the offer all the way to $4 should eat their losses, just as those who bought at $4 should keep their profits. On the other hand, assuming the whole episode was seen as one big error, then any trades that diverged from the prevailing NBBO before the crash of around $44, should be DKed. To our astonishment, the NASDAQ picked the totally arbitrary number of 15% to set as a threshold on DKing, meaning that any trades executed above $38.10 would stay, while every trade at $38.10 and below would be cancelled. As there were thousands of shares changing hands above this cut off, we are confident that many people will be very, very pissed, especially if they sold at the last accepted price of $38.38/share (see chart below). We urge if any readers traded PGN, or know of people who sold above this threshold, or, even worse, were stopped out and now see their trades stand, to immediately i) write us and describe their situation, and ii) to contact legal counsel and sue the NASDAQ for damages for setting a completely arbitrary cut off on what the exchange deems valid HFT manipulation, as opposed to outright insane. And much more importantly for everyone else: immediately set limit buy orders at 15% below the NBBO in eacn and every stock, with a subsequent sell limit the second stocks are unhalted. This will guarantee you that each and every time there is an HFT flash crash you will make lots and lots of money, courtesy of a market so broken, now apparently even the aliens are coming to help us.

Today's reverse engineered HFT algo strategy: if price drops more than x% in a millisecond, then enter order y% below bid, else pull all bids, especially when price is 90% below most recent NBBO posted a mere second earlier. Which is precisely what happened to Progress Energy (PGN), which dropped from $44 to $4 in less than second, but not in quantized fashion (i.e. fat finger), but in a gradual, than exponentially accelerating manner, as an algo took out all the bids. We can't wait for this week's 21st sequential outflow from equity funds: luckily investors are now all too aware that holding a stock, any stock, is dangerous to one's sanity, not to mention stop loss orders. And where the hell was the circuit breaker on this one? The market is and continues to be a miserable joke, especially courtesy of Nasdaq and the 160 trades in PGN that occurred at ridiculous, HFT-exaggerated prices. And of course, all those lucky fools who bought the stock at a 90% discount are about to be DKed, because it is Nasdaq's prerogative to protect its HFT paying clients, and not investors.

Gotta love those closing price targets, which were achieved to the penny. As for the market, the no volume meltups are once again back in vogue, as the ES and SPY both trade at two week low cumulative volumes.

As readers will recall, yesterday we highlighted the HFT-driven flash crash in Core Molding (CMT) after an algo very obviously went insane and took the stock price to $0.0001 in the span of one second. Today, courtesy of our friends at Nanex, we get a transposition of the events at 14:19 in all their visual glory, together with a succinct explanation of everything that went wrong.

A chart from Bespoke Investment Group demonstrates why Steve Jobs better pick his words very, very carefully. As AAPL accounts for a 20.1% weight in the Nasdaq, and is an HFT darling, as well as having every analyst on Wall Street loving it, should this stock tumble, we expect an 80 point ES drop in the market by EOD.

The Liberty 33 folks succeed in breaking the Nasdaq's 12 day losing streak in a 10 minutes no holds barred, rabid buying spree. The market is once again fully credible.

The latest confirmation of the stock market bubble comes from Sentiment Trader which points out that yesterday's Nasdaq TICK almost passed an all time high, yet settled down...to 8 year high levels. As ST points out: "There were only three other dates that even come close to the current extreme: October 4, 2001: The NDX was coming off a major low, but still backed off for 3 days before rising again. May 2, 2002: The NDX dropped hard for the next 3 days. May 15, 2002: The NDX managed to rise a bit for the next 2 days, then rolled over into a major decline. Since then, the TICK hasn't managed to get above +4000 at any point, even intraday, much less to the +5300 level it closed at yesterday. Truly remarkable." Ben Bernanke has now succeeded at convincing virtually everyone that moral hazard is the right approach to dealing with an insolvent financial system. And for another indication of just how overbought the market is, Sentiment Trader also points out that the equity-only Put/Call ratio dropped to 0.32, the lowest reading since January 16, 2004, which on a relative basis is 45% below six-month average. The conclusion: " That, my friends, has never happened before (at least going back to 1997)."