I talk to a lot of traders, every day. Many are hedge funds that are moving large amounts of money and are plugged into some of the most influential and sophisticated market sources. There seems to be consensus: This market is very erratic and hard to trade in.
Most of my sources don't really want to speak on record, but they are increasingly commenting on the bizarre market activity in all markets on a day-to-day basis. This includes action in stocks, currencies, commodities, and bonds. One manager of a large hedge fund did go on the record about the increasingly unpredictable markets yesterday: The legendary George Soros said he is "baffled" by the current markets, and this sentiment has led one of his fund managers to go to 75% cash.
Soros cited growing volatility in the market and the increased power of government actions to generate outsized moves. For example, one day you could have a looming Euro debt crisis; the next day you could have a new bailout, generating huge volatility.
There are plenty of other examples of weird stuff happening. Let me give you some more examples:
Last month, Apple Inc. (Nasdaq: AAPL) traded down sharply, losing 10% in one week to $320, just weeks before announcing blockbuster earnings (see: Apple Blows Away Even the Optimists). The stock now trades at $390, marking for a 25% range in less than a month. This is remarkable volatility for a company that has huge amounts of profits, a reasonable valuation, and is considered, by all measures, a "blue-chip." Why would Apple trade down so aggressively just weeks before a huge pop? Was somebody possibly trying to scare people out?
After a strong rally, treasury bonds have now turned south again and are trading like basket cases. One day, up big; the next day, down big. Yields fell from 3.6% to 2.9% in three months but have started rising again (for treasury bonds, prices move inversely to yield).
I warned you in May about a potentially violent summer chop (see: A Summer of Market Discontent?). We got it. The range on the S&P has been 1270 to 1360 over the last three months. We're basically now in the upper two-thirds of that range.
Can anybody explain to me the stock market action in just the last three trading days? For example, S&P 500 Index falling 20 points (1.5%) on Monday and then climbing more than 20 points (1.5%) the next day? Did the perception of the global economy really shift 3% in 24 hours?
Netflix Inc. (Nasdaq: NFLX) at 300 with a P/E of 80. Shades of 1999?
Yet Microsoft Corp. (Nasdaq: MSFT) trades with a P/E of 10, has $6 per share in cash out of its $27 share price, and pays a 2.4% dividend. But nobody wants to buy it. This is a huge dichotomy in the market -- large gains in speculative stocks, extreme caution, and low historical valuations for blue chips.
Gold at $1,600, a new all-time high. Currencies are extremely volatile. Gold has been going up against virtually every global currency, meaning you can no longer explain the strength with the pat "dollar weakness." I think there's something more to this safe-haven bid.
How to explain all of this? High-frequency trading (HFT) is most often picked on by traders as the culprit. You can also throw in the volatility caused by offering banks .25% overnight money -- and huge amounts of leverage -- which allows massive traders to go into short-term positions with as much as 100-to-1 leverage. Do you think these massively leveraged traders are in it for the long term? For those of you not following the HFT trend, it's become a growing force in the market, with electronic, computer-driven trading now accounting for more than 60% of NYSE volume. This comes with a secular decline in overall trading volume. In other words, the computers are taking over the system.
Speaking of leverage, did you know the New York Federal Reserve Bank is now leveraged 100-to-1? There are, of course, many saying that HFT trades, with their growing dominance, are pushing the market around to create intraday volatility in order to generate profits. This is being well-documented by firms such as Nanex, which are studying the trend.
Another cause, I believe, is something that Soros is onto. With debt crises springing up around the world and governments taking nearly daily actions to help alleviate the system causes enormous market instability, it leaves a lot of people nervous and on edge. For example, if you are a hedge fund, how comfortable are you holding an overnight position when you know that at any moment there could be a new sovereign debt-default, a currency revaluation, or new legislation that will move the market the following day?
I dont think LInkedIn ever traded below its IPO price. LinkedIn’s shares fell in the weeks after the May IPO, but lately have roared back to the lofty plateau reached on the company’s first day of trading.
If I remember correctly Eventually LInkedIn traded below its IPO price.I personally never believed much in the hype of IPOs.But for sure if there is a good deal on offer (like Dunkin) which was clearly priced below its fair value,then I would'nt mind taking a stab at an offering.
For this you need to be able to measure(& appreciate) value effectively (&objectively).Not everybody can do that easily.Its far more easy to be swept up the marketing tide of the Big Investment Banks and Underwriter banks who are promoting an IPO to bag their Big Bonuses.
As a fellow trader I can tell you honestly I have given up/lost interest in Day trading after looking at the level and extent of volatility in daily market moves.
@back2basicz,
I totally agree with you. This is not a traders market, even i would say not a investors market too. I belive we can get the same stocks at lower price level in coming days. Looks like some IPO's are giving good returns to the investors like LinkedIn, Dunkun Donuts etc.
This type of market makes it all the more important to have a strategy and tolerance for risk. The market will continue to be volatile through the election period; there is no real end in sight to the debt issues, recession, and unemployment and energy issues. Hence the market is on shaky ground because out consumption based economy is on very shaky ground. Until we see a major move toward economic stability the markets will be spooked and erratic.
Thank Scott for another important summary of market. This is what happening now, and may keep like this for a while. We average investors shall be aware of this trend and do our investment accordingly.
On the other hand, does this assert the market is an efficient-market? That is, one cannot consistently achieve returns in excess of average market return, given the information publicly available at the time the investment is made. Well, is all information publicly available? Hard to say.
Scott, I think you have your ear to the ground just right, and that the market IS spooked by the flash crashes and the debt crashes.
But at the end of the day, I think what is REALLY spooking the traders is the realization that those are just the manifestations of the ALGORITHMS at work. And those algorithms--built to be our money slaves--are more and more taking the reins and galloping free...
As a fellow trader I can tell you honestly I have given up/lost interest in Day trading after looking at the level and extent of volatility in daily market moves.
Its close to impossible to decide which direction to go in and with any degree of certainty.It also does'nt help that liquidity has fallen dramatically.
This is an Investors market(and not a traders one) if you ask me.
Maybe that is the all interfering Govts gameplan all along.Frustrate as many traders as possible thereby driving them out of the market so that the market dances to their tunes.Unfortunately by reducing Volume;Govts are only exarcebating the wildness of these moves and discouraging Price discovery.Not a Good sign.Not good at all....
Your article is a perfect example about the unpredictability of short term market movement, even for the experts at Wall Street. Most investors shall relax if they listen to Graham's advice: Let the Mr. Market to serve you, not to guide you.
Today is a great display of the wild action -- violent rally in stocks, violent sell-off in treasury bonds as money flows back into risk. However not all risk assets are benefitting because select commodities such as copper and cotton are getting crushed.
Good demonstration of lots of conflicting forces: China economic data came in weak overnight, pressuring many industrial commodities. Yet Euro and U.S. debt progress has lifted stocks and taken money out of treasuries.
This is an intresting dichotomy as the China trade is about economic weakness yet the stocks are displaying strength. Which side of the trade is correct?
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