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Investment Stats- The New Normal

In a review on what can be expected from the investment arena in 2011, if 2010 patterns of trade are repeated, it would seem that traders and investors have merged into one entity, and that they will have a testing time if they do not adapt to the new normal that is unfolding. Whether it is day trading to hedge exposure, or longer-term investment strategies that are being built, there are some nuances in place that really should not be ignored.

Monday Madness
U.S. equity performance for trade just on Monday’s in 2010 showed a 16% gain on capital. The four other investment days of the week in 2010 returned just over 1% combined, in a twelve month period. S&P Futures have an average daily trading range of 13.8 points (+1%), which highlights just how volatile trade has been, and just how hard it has been for investors to choose not only the correct sector, but also the correct day to be in any given sector.

With over 250 trading sessions in any given year, with each moving upwards of 1% on average on the S&P 500, netting 1% from 200 of those sessions and 16% from 50 of them, leads to some interesting conclusions.

Investing has taken on a new identity with “buy and hold” working if the Friday close is bought, and the Monday close is sold. A position trader could have opened a long S&P 500 futures position ahead of the close on Friday, relaxed on Saturday and Sunday, and closed out just before 4pm on Monday, and beaten the Tuesday-Friday slog. Meanwhile the traditional year-to-year “buy and hold” strategies have only just turned positive for those investors who went long the S&P ten years ago.

Gone In 22 Seconds
Michael Hudson, an economist at the University of Missouri revealed recently that 22 seconds was the average time that an equity position was held during the 12 months of 2010 trade.

That makes the 8 hours of Monday-only position trading seem like an eternity, and should put into perspective market expectancy regarding fair value and tolerance for risk. The new-era mantra has switched from “buy and hold” to “buy it, and if it moves, sell it”.

With 1320 being a pivotal price point on S&P 500 trade, and an area that had two dramatic reversal collapses in May 2001 and August 2008, investors may need to pay attention to what is unfolding in the near-term.

60 Minute Rescues
The impact of the Federal Reserve’s mandate of open market interference has also set out a new normal regarding market mechanics. On the days of Permanent Open Market Operations (POMO), where the Fed buys back recently issued Treasury notes, and by default or design forces Primary Dealers into the equity market, the last hour of business tends to have a significant spike to the long side of trade.

POMO days may be the savior of the Tuesday-to-Friday whitewash with a pattern that clearly shows the dominance, and/or reliance, on the drip-fed Federal Reserve backstop of risk.

Low Volume Ramps
As Wall Street equity markets grind higher in their newly formed patterns of trade that take out 2010 and 2011 highs, the volume levels have collapsed. This week has seen S&P futures test 1320, a price point not seen in over 2½ years, on the lowest volume days of the year.

The Monday ramps, the Tuesday-to-Friday slogs, and the last 60 minutes of trade on POMO days, are all running on fumes. A new normal is being created, where so long as there are at least two high frequency trading (HFT) algorithms looking for S&P movement, there will be plenty of sporadic price action.

Instant Gratification
The new normal has certainly tested the resolve of retail investors who have withdrawn money from mutual and hedge funds in record numbers over the course of the last 12 months, as the Monday melt-ups and HFT/POMO smash-and-grabs dominate the equity landscape.

With a long-term position now covering three days, with two of those being a weekend, and the average 2010 trade lasting less than half a minute, the new normal in investing and trading has caught up with the twitter-like world of instant gratification.  

Attention spans are now about as long as the 22 second equity trade, in a new normal environment that limits most to 160 characters as the maximum that can be absorbed in any one sitting; if it cannot fit in an instant message, forget it.

Currency Diversification
Challenges will occur on the next major test of support for S&P 500 trade that comes on a low-volume, mid-week trading session that has no POMO to rescue the last 60 minutes of trade, which is initiated by a sound-bite headline crossing the wires.

No wonder commodity and currency trading have emerged as the new-normal in forming part of a balanced portfolio; because equity trade is rather testing for those looking for common sense, even if a lack of reality is the new norm.