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Futures Trade Desk- Buy and Hold, Or Buy and Sell?

Daily Client Note

Global Market Review


Buy and Hold, Or Buy and Sell?

As equity indices test the break-even point for 2011 ahead of a week of political and banking jawboning, a certain reality is finally forming for many in regard to trading expectancy and subsequent follow through.

The realization that the main participants in the stock market arena are high-frequency trading (HFT) algorithms will come as no surprise to most, and love them or loathe them HFT’s are in control. The question from Main Street now is not about who is in control, but whether Wall Street can deliver in the new environment. 

The mass exodus from equity managed funds over the last 24 months suggests confidence in the Pros may not be running high. The increase in Managed Futures trade looks to be in part as a result of the shift from buy-and-hold towards buy-and-sell.

The move towards instant-reward HFT trading has created sharp increases in intra-day volatility which has left an unpalatable taste in the mouths of most investors and traders. A consequence of massive manipulation by central bankers in an effort to synthetically induce growth has been met head-on by technical account churning created by millisecond price action, (tenths of a second are so 2008…)

A major consequence of a quantum leap in market mechanics, which is leaving fundamental analysts scratching their heads, is the sheer dominance of technical algorithm trade. Technical price action stands head and shoulders above outlook and guidance analysis in regard to predicting potential market movement and levels of sustainability on any given day.

Many fundamental analysts can share the same opinion, or not as the case may be, but few are capable of generating price action. Technical analysis however has become dominant in the new-generation markets, and algorithm-based analysis which is backed by HFT trading capabilities now holds the upper hand in predicting where price action will get to on any given day.

Never before has a fundamental opinion been so underweight in regard to the historical 50/50 balance that market makers and investors use to calculate fair value. Global technical analysis of futures trading patterns are far more reliable a gauge of potential price action and follow through than an opinion based on fundamentals that have not adapted to a massive black swan period of trade that has spanned the last 36 months.

Traders and investors have left the markets in droves, with some never to return, while long-term institutional investors now make up only 10-15% of volume on any given global trading day. Add to the facts that in 2010 the average hold time of a newly generated equity position was 8 seconds, and it is no wonder that many professional traders are incapable of matching the lowly year-to-date S&P 500 benchmark returns.

A global outlook, with reduced expectancy and ability to bank early and often are the keys to success. Without it the game will continue to be played with ever decreasing participants, and ever increasing frustration for those waiting for the halcyon days of buy-and-hold. This isn’t Grandpa’s Market, and the new rules of engagement will not suit everybody, but one thing is certain; what worked over the last two decades will not be adequate in the robotic world of HFT technical trading.

The massive interest in client-based technical charting applications is proof positive that brokerage houses understand where the next meal ticket is coming. Technical analysis that generates revenue from investors and traders doing it themselves is an increasing phenomenon. But with limited time and resources, that may be a short-term approach which does not get to the root of the current issue.

Get up to speed, or get out, is the mantra for those who are taking this market on each day. And for the professionals purporting to be able to be at the top of their trading and investing game it should be very clear that client expectancy has never been so high. Unfortunately, those who are charged with beating alpha who have not yet incorporated a different game-plan may also find that client patience levels are not what they once were.

Those who do participate in the trading game each day need a new outlook and a unique type of support program that does more than allow entry to the arena. A road-map and realistic outlook are key elements in plotting success, far more than just turning up and flicking a fundamental coin.

There are plenty of opportunities being offered in the current market conditions, but not for those with rose-tinted glasses or a disdain for the impact of global momentum and technical research. The warnings are out there; make the change to globalized trading with Futures contracts that can be accessed 24-hours a day, or move on. The Future is here, and this is the new normal.