Good morning. The bears were quick (I mean, VERY quick) to inform me that Monday's tape action was exceptionally bad. There was talk of a "key reversal" day, which tends to be a precursor of bad things to come in the ensuing days, as stocks gave up the strong early gains on the back of a better-than-expected ISM report and wound up finishing mixed. And I will agree that the "action" certainly has not been encouraging of late. However, my question this fine morning is: Does it really matter?
To be fair, ever since Ben Bernanke confirmed that the Fed was going to infinity and beyond with its latest QE program, the action has been downright disappointing. For example, in the 12 sessions since Gentle Ben announced the FOMC's newest effort to keep the economy out of a Japanese-style deflationary spiral, stocks have enjoyed only one decent day. In addition, the major indices have endured bouts of significant intraday selling in all but one of those 12 days. In short, it's been ugly to watch.
In the old days, you know, back when humans made the majority of the decisions in the stock market, the type of action we're seeing right now was called "distribution." If traders were seen consistently hitting the market with sell orders over a prolonged period of time, it meant that the big boys were carefully unloading stocks into any and all strength. And the bottom line is that a period of "distribution" usually meant that a more serious corrective phase would soon follow.
However, as I told a colleague yesterday afternoon, I'm not sure the recognition of such action matters at this point in time. My argument was simple. If you watch a one-minute chart of the S&P 500 (or any other major index for that matter), it is quite clear when HFT programs hit the tape. You see, when HFT programs are run (aka "the algo's") stocks will, out of nowhere, suddenly spike in one direction or the other for several minutes. And usually such programs are run in response to a news headline, a data point, or a comment from an important Fed official, politician etc.
Such was the case yesterday after the ISM Manufacturing report was released. Bam - within five minutes the S&P had moved up 5 points as the report came in well above the consensus expectations. After an initial HFT-induced burst higher, the humans then got involved and the market continued to rise (albeit at a much slower pace, which is the telltale sign that it's people not computers moving the market) for a while as the report indicated that the economy wasn't about to stop on a dime. And this, of course, was good news that deserved a quick response.
From there however, the action got interesting and is the source of my consternation this morning. You see, while the bears are quick to tell me that the "action" was terrible due to the fact that the early rally "gave way" to significant selling, what I saw was something a bit less horrific.
What I witnessed Monday afternoon was a series of sell program that occurred either in bursts or by themselves. And before you start howling that I'm a permabull, let me state for the record that I don't have a problem with HFT algo's racing to react to headlines, data, or even rumors. No, my problem is when the market gets pushed around by the boyz and their computer toyz for no reason.
And make no mistake about it; this is what happened yesterday. There was no data released, no news headline, not even a decent rumor out of Europe. No, this was a case of the computers knocking the stuffing out of certain areas of the market (the bears' weapon of choice lately appears to be the semiconductors) without a catalyst, which, in turn, pulled the indices lower.
As I've said, I don't mind seeing the market move at the speed of light when there is a catalyst. However, I DO mind when the market falls 8 points in 8 minutes for no reason at all and then dives another 8 points a few minutes later - again, without a catalyst other than the computers trying to jump onboard the latest market trend within seconds of the move beginning.
To me, such moves smack of what I call "hedge fund follies" where funds run programs designed to push the market around - just because they can. In the old days, a single trader, no matter the size, couldn't move the market. But these days, it happens all the time. So, while my friends in the bear camp will tell me that I'm just not "getting it" and that "the tape tells all," I'm just not sure I agree that such "action" matters anymore. But I guess time will tell on this score.
On the subject of HFT, the Europeans appear to be making a concerted effort to slow down the machines. But unfortunately here in the States, we're more concerned about profits. And since the NYSE is now a public company and HFT is a BIG source of revenue (remember, reports indicate that nearly 70% of all trading is HFT these days), well, we aren't likely to see anybody do anything about the games people play on Wall Street anytime soon.
Turning to this morning ... Word that the Spanish Government may be close to formally requesting assistance from the EU has lifted sentiment on both sides of the Atlantic.
Major Foreign Markets:
- Shanghai: closed
- Hong Kong: closed
- Japan: -0.12%
- France: +0.32%
- Germany: +0.51%
- Italy: +1.04%
- Spain: +1.45%
- London: +0.25%
- Crude Oil Futures: +$0.29 to $92.77
- Gold: +$1.10 to $1784.40
- Dollar: lower against the yen euro, and pound
- 10-Year Bond Yield: Currently trading at 1.652%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +6.60
- Dow Jones Industrial Average: +49
- NASDAQ Composite: +14.77