Double Top or Advance the Rock?

Strange days continue in this market... Wednesday was a great example. Futures flat - and then an explosion of buying on no news within the first hour of the market being open. Why? Great question. You don't usually see the market move like that in advance of a Fed meeting. There was no news... but just a rally out of the blue. We are working on day 23 of 24 without a pullback of greater than 0.5% in the S&P 500... the rally itself here is not remarkable in of itself, but the nature of it - without any serious pullback for even a session is.

I am looking at a lot of individual charts and continue to be stared back with stocks on parabolic runs or stocks slowly breaking down, breaking support. But the general market is holding up - my watch list is not full of the type of merchandise that has been in favor the past two weeks, so that could explain the divergence in what I am seeing versus the market doing fine. I am actually working hard to find new long positions since (a) we expunged quite a few completely from the portfolio lately and (b) many stocks sitting at the bottom of our portfolio at 0.1% type of stakes have poor charts. Because they are weak, they are staying as tiny holding positions until they fall much further or jump back over key resistance areas. On the flip side, almost everything I like is running on a 45 degree angle.... hard to chase into those.

Thus far on the S&P 500, Fibonnaci has held his ground - he rejected the bulls [Jul 7, 2009: Fibonnaci's Last Stand] on their first thrust forward (no real surprise there) With Wednesday's morning jump out of the blue, we are making a second advance to the upper 1010s. So either we are about to hit a double top, or about to make a new leg up. Action in the next few days should give us a resolution to that riddle. I will keep leaning on the technicals here - because so many computer triggers are now set to them. If we break north of the high of last Friday, I expect computers to rush in yet again. This pattern continues - a technical level is breached, computers rush in. Rinse. Wash. Repeat.

We're having another very good 4 week period, and aside from 2 unrealized losses in shorts Wynn Resorts (WYNN) and Capital One Financial (COF), I am content with everything, so I don't have any performance anxiety issues that apparently are afflicting much of The Street. As we are now in week 5 of rally mode, and most of these rallies have been 6-7 weeks in duration before some rest / retrace, we are just biding our time until football season when I think there is a better chance for the forces of darkness to reassert themselves. A lot of signposts that used to signal inflection points are everywhere - but they don't seem to work very well anymore - insiders unloading stock like made to ravenous computers, complacency high, speculative junk rising the most, short interest dropping sharply, et al.

• Wagers against the Standard & Poor’s 500 Index fell to the lowest level since February as investors shorted fewer shares of financial stocks. Short interest on the S&P 500 declined to 8.77 billion shares as of July 31, a 12 percent decrease from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg yesterday. That’s the steepest drop since Sept. 30, 2008.

I will keep saying I think the nature of the markets has completely changed with the advent of computers dominating the game. The exact number is hard to gauge - some people say 30%, some people say 70% of all trading is now computers - computers don't have human emotions so what used to work, works less now.

I've said that for 2+ years, and I'll stick to my guns there. Basically take half the volume each day, and understand that is just computers making thousands of trades (sometimes in a minute) doing things you will never understand and have little to do with the company's prospects or fundamentals. What will be interesting is surely there will be a Black Swan event sometime in the next 10 years where computers will crash the market. And then we'll ask "how did we get here?" And maybe ask "what is the stock market for?"

It used to be as a way to raise money for companies, and let people "bet" on long term prospects of a company as "shareholders" of a company. Now it's just a way to slice and dice millisecond profits off non-random pattern recognition; this system will increasingly drive out old school humans, frustrated by that. And those comments have nothing to do with the market being up or down - I literally fear being in the market the last 10 minutes of the day with what I see happening each day; sharp moves up or down on huge floods of volume. I wonder how different the market would be if we had an outrageous rule like you had to own a stock for at least 5 seconds. Is being a "shareholder" for 10 seconds egregious? I bet volume would drop 30% instantly...

• Machines are taking over the management of equity assets, according a new report issued this week by Tabb group, the research house that drew heavy attention to the proliferation and effects of high frequency trading in US equity markets. Securities Industries News wrote up the report, saying Tabb believe up to 34 per cent of US equity investments are now managed by a broad set of strategies that can be classified as “quantitative” or automated methods. That compares with 14 per cent in 2000.
• What is occurring is “the gradual automation of the entire investment management process across a comprehensive spectrum of investment strategies,’’ the report, authored by Paul Rowady Jr. and Adam Sussman, said.

So the market acts differently; plus all this money being borrowed from the Fed at 0-0.25% (up from $40B in 2007 to $900B+ now) can't be sitting on bank balance sheets, I am sure like in China some is coming into the stock market. At least China admits this is happening...

Anyhow, whatever the case - until things change or HAL9000 recognizes a new pattern, I'm content to make some intraday moves to keep up with the bulls (did 1 yesterday post Fed that paid off nicely) and keep looking for longs that are not in stage 5 of parabola, while keeping my list of new shorts to add to. We mentioned

Shanda Interactive (SNDA) last week and how we kept trying to short it with a limit order but we kept missing (from $54 to $53 to finally $51.75, still missed our entry!). [Jul 7: Shanda Interactive - Weak]

It continues to be weak and shows there is money to be made on the short side even in good markets. Just don't short Las Vegas casinos, banks or REITs I suppose!

Short Wynn Resorts, Capital One Financial in fund; no personal position

Comments

[enigmaman:]

Markets manipulation by computer trading seems to be a rational explanation for the astounding yet questionable moves we have seen since March, that being the case then all the tools used in the past to determine how to act within the market should have no relevance any longer, If the market is nothing more then an automated computer program reacting to specific pre programmed triggers for anyone to be able to play in this game they will need to get a copy of the programmers strategy.

Aug 14 08:03 AM

[mcover:]

I completely agree. Been doing this for 30 years - strangest market I've ever seen. We are having a terrific year but I am now (and its a recent adjustment) at the highest cash levels in a long long time? Also, it strikes me that the quality of the recent (as in last 7 - 10 days) has been especially poor with names like AIG and $2 stocks doubling or tripling being the norm. Not the stuff that normally preceded another leg up...

Aug 14 08:29 AM

[Suzanne H.:]

Trying to think like a programmer (since I used to be one in a past life) -- I don't see us slicing through the 38% retrace of the entire move from top to bottom (around 1014 on spx) without retracing 38%-50% of this recent rally first. Credit markets are getting weak again. Of course I could be mistaken, and my stops on my 3 inverse positions (DUG/FXP/EEV) are tight so I will get stopped out (likely today) if we do punch through. Small risk big reward if we don't go higher. Trading is about playing the odds, and if we are up against other machines or humans same rules apply -- buy/sell discipline w/risk management.

In fact we humans will find an edge as we will spot patterns more efficiently than a programmer, especially if things in the past don't work -- we will adapt faster. That is why we can't get a machine to drive a car, whereas most of us can drive and talk and eat.... Our only downfall is emotions, so if we can learn to take that out of the equation and trade on technicals we should be able to profit.

Aug 14 08:41 AM

[Tony Petroski:]

Mr. Mark. If I understand what you are saying, the patterns you were familiar with have changed, probably due to more extensive use of computer-generated trades. These trades, in general, are of short duration, but the daily/weekly/monthly trends they produce tend to persist longer than the old patterns.

Your mind is a computer. Reprogram it and trade the new trends.

You are right to be wary of the sudden crash, when the computers all agree to get out at the same time, the average investor will be left behind 20% later.

Aug 14 09:29 AM

[enigmaman:]

Mr Barton Biggs said yesterday that he doesnt expect that we would have retested the March lows but expects the S&P500 to stay in a range from 1400 to 700 for the next FIVE YEARS and this is what he considers a bold recovery. Even if he is right and we dont test the March lows the difference as I see it is like falling 7 floors instead of 8, the end result would seem to be the same. For him to actually have said what he did with a straight face is quite amazing, but the headline did caught my eye something to the affect " Bold recovery" whatever. Sounds bites and headlines is all most people read anyway.

Aug 14 10:31 AM

[Suzanne H.:]

Whatever system has you in high cash levels justifies why you have been doing this for 30 yrs. However, I believe we have to go all the way back to the early 30's and observe market behavior then to get a feel for our markets these days. So much similarity and it wasn't the machines back then, very interesting.


On Aug 14 08:29 AM mcover wrote:

> I completely agree. Been doing this for 30 years - strangest market
> I've ever seen. We are having a terrific year but I am now (and
> its a recent adjustment) at the highest cash levels in a long long
> time?

Aug 14 11:33 AM

[clipper:]

I agree

The similarity is liquidity, or lack of it. That is what drove the 30's crash and what will drive this one. Credit contraction causing money to "disappear". In the 20's-30's we didn't define mortgages, derivatives, and CD swaps as "money", so this meltdown, whats left of it, will be biggy sized. I hope the computers know when they are broke ... could cause more liquidity problems even if you are on the right side of the trade.

On Aug 14 11:33 AM Suzanne H. wrote:

> Whatever system has you in high cash levels justifies why you have
> been doing this for 30 yrs. However, I believe we have to go all
> the way back to the early 30's and observe market behavior then to
> get a feel for our markets these days. So much similarity and it
> wasn't the machines back then, very interesting.

Aug 14 12:08 PM

[Mad Hedge F...:]

hkl,. Traders are keeping a laser eye focus on two bellwether markets, which are starting to roll over like a cheap date. The red hot Shanghai stock market has dropped 10% in the past few weeks, putting in an ominous double top on the charts. The Baltic Dry Index, an indicator of Chinese bulk raw material importing expectations, put in its worst week in a year, off a bone chilling 40% from its recent peak. What are these markets telling us? Best case, the market is going to sleep. Worst case, we are seeing the red skies of a global sell off. Better trim back you're long exposure of every size, shape, color, taste, and smell. This year’s mini bubble is over.

Aug 14 12:22 PM

[Suzanne H.:]

Remember quants didn't do so well last year. My funds are quant driven as well, but with a human touch by keeping the global macro picture. Most of the systems were calibrated for post world war 2 trading scenarios -- this is definitely not. Global macro is too discretionary, and quant driven strategies are too rule-based and need to be adjusted based on the macro developments.

Agree regarding China -- it looks like it is the leader both up and down. I was concerned before the open regarding my double short positions (FXP/EEV/DUG) as they were very close to the stops. Even though I have been shorting the market this week, not sure the mini bubble is over yet -- it may have one last grasp of air after a short term correction, but will have to play it as we see it, and it will depend on a lot of indicators -- especially a rally in the $ and treasuries as the markets will correlate negatively to those.

Aug 14 01:21 PM

[TraderMark:]

Keep up the comments, enjoy your line of thinking.


On Aug 14 08:41 AM Suzanne H. wrote:

> Trying to think like a programmer (since I used to be one in a past
> life) -- I don't see us slicing through the 38% retrace of the entire
> move from top to bottom (around 1014 on spx) without retracing 38%-50%
> of this recent rally first. Credit markets are getting weak again.
> Of course I could be mistaken, and my stops on my 3 inverse positions
> (DUG/FXP/EEV) are tight so I will get stopped out (likely today)
> if we do punch through. Small risk big reward if we don't go higher.
> Trading is about playing the odds, and if we are up against other
> machines or humans same rules apply -- buy/sell discipline w/risk
> management.
>
> In fact we humans will find an edge as we will spot patterns more
> efficiently than a programmer, especially if things in the past don't
> work -- we will adapt faster. That is why we can't get a machine
> to drive a car, whereas most of us can drive and talk and eat....
> Our only downfall is emotions, so if we can learn to take that out
> of the equation and trade on technicals we should be able to profit.

Aug 14 01:42 PM

[TraderMark:]

Been doing so Tony. Just finding it sad that 10-15 years of experience has become useless in this new era. But adjust or die.

Still like the 10 second hold rule :) - I think it would change us back to the "right' way although those who trade in 30 milliseconds believe there is no "right" as long as there is a way to scalp profits.


On Aug 14 09:29 AM Tony Petroski wrote:

> Mr. Mark. If I understand what you are saying, the patterns you
> were familiar with have changed, probably due to more extensive use
> of computer-generated trades. These trades, in general, are of short
> duration, but the daily/weekly/monthly trends they produce tend to
> persist longer than the old patterns.
>
> Your mind is a computer. Reprogram it and trade the new trends.
>
>
> You are right to be wary of the sudden crash, when the computers
> all agree to get out at the same time, the average investor will
> be left behind 20% later.

Aug 14 01:43 PM

[TraderMark:]

quants were crushed in Aug 07 as well

problem is they are almost all doing the same thing

and the door is only so big
only so many computer chips can fit through at the same time

Now that I am seeing a lot more of these things revealed it is making it much more clear how RenTech has been making 40% a year, for a decade

Goldman apparently got the book the past 2 quarters with only 8 losing days in Q1 and 3 in Q2. Must of finally infilitrated RenTech.


On Aug 14 01:21 PM Suzanne H. wrote:

> Remember quants didn't do so well last year. My funds are quant
> driven as well, but with a human touch by keeping the global macro
> picture. Most of the systems were calibrated for post world war
> 2 trading scenarios -- this is definitely not. Global macro is too
> discretionary, and quant driven strategies are too rule-based and
> need to be adjusted based on the macro developments.
>
> Agree regarding China -- it looks like it is the leader both up and
> down. I was concerned before the open regarding my double short
> positions (FXP/EEV/DUG) as they were very close to the stops. Even
> though I have been shorting the market this week, not sure the mini
> bubble is over yet -- it may have one last grasp of air after a short
> term correction, but will have to play it as we see it, and it will
> depend on a lot of indicators -- especially a rally in the $ and
> treasuries as the markets will correlate negatively to those.

Aug 14 01:45 PM

[Ergo:]

Quote: "What will be interesting is surely there will be a Black Swan event sometime in the next 10 years where computers will crash the market."

Unfortunately, your statement may be downright prescient. And given the awful fundamentals right now, your time frame could potentially be a little too long. We live in a world of tremendous danger, largely not priced into the market. A black swan event any time in the next few years would be crushing. And there are certainly groups out there that would like to see it. IMO, basic assumptions need to be questioned in this market.

Aug 14 02:33 PM

[Suzanne H.:]

Yes and what they have to their advantage is size. We are smaller and will be far more nimble whereas they will leave huge footprints. But with their size we can easily get stepped on in the process. Like the close today: DUG 10ema on 60 min chart is 16.9, closing price 16.9. For FXP it is 10.10, closing price 10.08. OK, for some longs, VWO 20e on 60' 35.53 close 35.54. Talk about rinse/wash/repeat this is nuts.

Well what have we learned as humans, we want to tag along the machines and trade based on technicals knowing that this is not supported by fundamentals/macro pic so when the trade gets crowded we have to have our exit automated always slightly ahead of where the machines will try to exit. Basically this isn't anything that a good disciplined trader wouldn't be doing anyway, following a trend with good risk management, sometimes having to get out and back in at a higher cost but that is the price to pay for protection.

On Aug 14 01:45 PM TraderMark wrote:

> quants were crushed in Aug 07 as well
>
> problem is they are almost all doing the same thing
>

Aug 14 04:59 PM

[Suzanne H.:]

Oh, and we can monitor markets that are too big for them to manipulate to get confirmation of our macro picture (for example, treasuries getting a bid and the dollar rallying, shanghai piercing its 50dma last night, etc.).

Aug 14 05:04 PM

[untrusting ...:]

Yes agree ... between the massive Fed liquidity, GS, HFT's, algo programs, etc .... it has become a market where fundamentals, technicals, past historical relationships, and virtually any other indicators are pretty much useless.... hence the irrational continuing rise in the market since March. In essence the big money has turned Wall Street into the biggest casino in the world where they have the tools and the advantages to rake off tens of billions of dollars annually in profits. Wall Street was originally a capital market intended to facilitate the raising of capital for productive business operations with a resulting return on investment to the capital providers. It was never intended to become the world's largest casino with unfair ST trading advantages and rake-offs to the big players. However there is a simple solution, if only the government has the guts to do it.... simply tax all ST trading profits (be that 1-day or even 1-week or less holding periods) at very high rates such as 90-95%. That would almost instantly destroy any incentives to "game" the markets with very ST trades and move the markets back towards their intended purpose of being capital markets instead of rigged casinos. The question being ... if one cannot even buy and hold a stock, bond, option or other product for even as little as 1 week ... then why should such ST speculators be allowed to distort the primary purpose of the entire capital markets?


On Aug 14 08:03 AM enigmaman wrote:

> Markets manipulation by computer trading seems to be a rational explanation
> for the astounding yet questionable moves we have seen since March,
> that being the case then all the tools used in the past to determine
> how to act within the market should have no relevance any longer,
> If the market is nothing more then an automated computer program
> reacting to specific pre programmed triggers for anyone to be able
> to play in this game they will need to get a copy of the programmers
> strategy.

Aug 14 06:27 PM

[untrusting ...:]

How is 700 not a retest of the March low of 666? Barton Biggs "prediciton" of 700-1400 for five years seems virtually worthless ... give us a break a 100% range ... now that's really going out on a limb isn't it.


On Aug 14 10:31 AM enigmaman wrote:

> Mr Barton Biggs said yesterday that he doesnt expect that we would
> have retested the March lows but expects the S&P500 to stay in
> a range from 1400 to 700 for the next FIVE YEARS and this is what
> he considers a bold recovery. Even if he is right and we dont test
> the March lows the difference as I see it is like falling 7 floors
> instead of 8, the end result would seem to be the same. For him to
> actually have said what he did with a straight face is quite amazing,
> but the headline did caught my eye something to the affect " Bold
> recovery" whatever. Sounds bites and headlines is all most people
> read anyway.

Aug 14 08:05 PM

[Macro_Man:]

Suzanne: The trend is still up, steep and powerful. The corrections have largely been sideways, choppy and shallow. Tough to be short unless one is unbelievably good. All the ultraleveraged ETFs are setting lower lows and lower highs.

I think it is a few weeks and at perhaps 10% too early to go short. The volumes are light and the tape gets painted every evening at the close. The double leveraged stuff and puts just leak value because of the back and forth action.

I am playing the bearish side by being long TLT between 90 and 93 and also taking positions that will benefit as the dollar gets stronger. I am short Amazon as a weak link in technology with little risk of a short squeeze and I am trying to figure a way to get short China. Dont know if FXP is the best way at the moment, but have no other ideas. I bought SMN and EEV today but sold in the afternoon because I wanted to avoid getting cut by computers at the close. I am also taking profits or cutting losses very often because staying short is a sure way to lose money in this bear market rally. One is a sitting duck. Also, I am often hedging my synthetic short plays by going long S&P calls or S&P (put protected) to offset the damage that can be caused by the bounces. I bought SPY around 3:40 PM today and picked up 1% by selling in extended trading hours...day after day, you see something pushing the markets up in the last 5 minutes.

I think it is prudent to wait till we see selling on heavy volumes, that is when the computers cant push things around at the close every time.

But here is the conundrum; when the turn occurs it could be dramatic because of the nature of this rally. Things may gap down and if one is not already short, one might have missed a big move.

So, I guess the options are get short too early and suffer or one day too late and you have missed the big move.

Aug 14 08:13 PM

[Per:]

Great approach and mindset.

The 50%+ run from March to August is not surprising; we are in a secular bear market and are experiencing a cyclical bear market rally. The markets are topping out and both Nasdaq and S&P are failing to break 2,000 and 1,000 (sure, the *machines* pulled it above the last 10-minutes which is insignificant).

I agree, we are slowly rolling over. Come next week we'll see even more profit taking with 2-3% down days. G/L!


On Aug 14 08:41 AM Suzanne H. wrote:

> Trying to think like a programmer (since I used to be one in a past
> life) -- I don't see us slicing through the 38% retrace of the entire
> move from top to bottom (around 1014 on spx) without retracing 38%-50%
> of this recent rally first. Credit markets are getting weak again.
> Of course I could be mistaken, and my stops on my 3 inverse positions
> (DUG/FXP/EEV) are tight so I will get stopped out (likely today)
> if we do punch through. Small risk big reward if we don't go higher.
> Trading is about playing the odds, and if we are up against other
> machines or humans same rules apply -- buy/sell discipline w/risk
> management.
>
> In fact we humans will find an edge as we will spot patterns more
> efficiently than a programmer, especially if things in the past don't
> work -- we will adapt faster. That is why we can't get a machine
> to drive a car, whereas most of us can drive and talk and eat....
> Our only downfall is emotions, so if we can learn to take that out
> of the equation and trade on technicals we should be able to profit.

Aug 15 12:39 PM

[Suzanne H.:]

Macro_Man, you are absolutely correct, characteristic of historic bear market rallies are such powerful rallies that crush the shorts. Playing the inverses on either an intraday or very, short term daily chart has been holding up provided stops are kept very tight and positions small. If the SPX doesn't fail here then yes, we have upside, 1050, 1120. Again a higher open on Monday will very likely hit my stops (long DUG/FXP/EEV) as I keep moving them tighter. The risk/reward here is favorable and will be watching trading in asia overnight. You are watching the same things, in order for the market to correct we need the $ to hold and rally, as well as treasuries (and they have been getting a bid even though most have been very bearish on both -- great contrarian signal). China has hit resistance and declined over 10% off its 38% retrace. SPX is stalled there now as well (1014) and may follow suit. Otherwise, we have gaps to fill and upside up to 1100. Nice trades and I like how you put it, shorts feel like sitting ducks, but it is possible the longs are going to be the sitting ducks. Both sides need to be played diligently.


On Aug 14 08:13 PM Macro_Man wrote:

> Suzanne: The trend is still up, steep and powerful. The corrections
> have largely been sideways, choppy and shallow. Tough to be short
> unless one is unbelievably good. All the ultraleveraged ETFs are
> setting lower lows and lower highs.
>
> I think it is a few weeks and at perhaps 10% too early to go short.
> The volumes are light and the tape gets painted every evening at
> the close. The double leveraged stuff and puts just leak value because
> of the back and forth action.
>
> I am playing the bearish side by being long TLT between 90 and 93
> and also taking positions that will benefit as the dollar gets stronger.
> I am short Amazon as a weak link in technology with little risk of
> a short squeeze and I am trying to figure a way to get short China.
> Dont know if FXP is the best way at the moment, but have no other
> ideas. I bought SMN and EEV today but sold in the afternoon because
> I wanted to avoid getting cut by computers at the close. I am also
> taking profits or cutting losses very often because staying short
> is a sure way to lose money in this bear market rally. One is a
> sitting duck. Also, I am often hedging my synthetic short plays
> by going long S&P calls or S&P (put protected) to offset
> the damage that can be caused by the bounces. I bought SPY around
> 3:40 PM today and picked up 1% by selling in extended trading hours...day
> after day, you see something pushing the markets up in the last 5
> minutes.
>
> I think it is prudent to wait till we see selling on heavy volumes,
> that is when the computers cant push things around at the close every
> time.
>
> But here is the conundrum; when the turn occurs it could be dramatic
> because of the nature of this rally. Things may gap down and if
> one is not already short, one might have missed a big move.
>
> So, I guess the options are get short too early and suffer or one
> day too late and you have missed the big move.

Aug 16 10:28 AM