Just like that, “the tide reversed and the sea exposed where it had been and where that was, the once proud boats lay askew on the muddy bottom.” A poetic description of what happened yesterday, no doubt, and, yet, it works. In one moment, the market was up and in the next, well, the tide reversed.
- Equities reversed gains as the Wall Street Journal reported that Syrian warplanes struck targets in a western Iraqi province.
When the reversal happened, I was sitting with my friend, Miggie, and we just happened to have the computer in front of us. We were actually watching a live chart of the market, specifically the Dow. “Swiftly, the water receded, as if on command to be gone.” As we watched, she asked, “What happened?”
A natural question for a student of the game, as she is, an interesting question for a veteran, as I am. We looked for a catalyst, some news that would have answered her question, and none was to be found, so I answered her with my thought, which was that the high-frequency-trading (HFT) computers, just went crazy, a mini-flash crash if you will. Apparently, David Moenning thinks the same …
- Yesterday’s triple-digit decline in the DJIA wasn’t accompanied by any obvious catalyst. No, this appeared to be a case of the big boys and girls playing with their computer toys.
“How could that happen,” she wondered. She asked me to explain the concept. I enlightened her as to how the really rich folk have computers with software that can execute hundreds of thousands of trades per second. “Is that legal?” she asked with wide eyes.
- The pullback appeared to be triggered initially by a punk 2-year note auction as the first big wave of sell algos were aligned with the release of the auction results. From there, the algos took over and a “key reversal” day was manufactured by the big banks/hedge funds and their computers.
Maybe the above explains how it began, and maybe not. What I know and what I remember are the days back in 2008 and 2009 when “Just like that, ‘the tide reversed …’” and the market dropped 1,000 points, or it reversed and went up 700. I explained to her about the circuit breakers the exchanges installed after those wild days on Mr. Toad’s ride.
“And when the tide quickly reversed in the next year, their prayers were answered. The outgoing water slowed, as if an invisible hand commanded it.”
- An “ignition algo” is run to try and get the trend-following algos’ attention. Then once a significant trend develops on an intraday basis, everybody jumps into the pool so to speak. From there, the algos chase each other in one direction until either (a) a reversal occurs or (b) the closing bell rings. Boom – you’ve got instant volatility on your hands.
I told her about how the Securities and Exchange Commission (SEC) was looking into high-frequency trading to see about regulating it. The look on my friend’s face seemed to say “Duh!”
The bottom line here is high-frequency trading is a reality, as unfair as it might seem. And as much as we might want to rail against or do rail against it, we have to accept it as part of the game, until it is not. I suspect the SEC and the exchanges themselves will stick with the plan to curb the influence of HFTs, but, in the meantime, what happened yesterday, HFTs or not, actually made some sense.
- Stocks came into Tuesday with an overbought condition, sentiment readings that had reached extreme levels, waning momentum, and a very high level of complacency.
I don’t know about the “extreme levels” part above, but I do know that today the market is not following up on the down day yesterday. In fact, it is acting quite reasonably at the moment. Of course, that could change if Iraq strikes back at Syria, if Russia invades Ukraine, or if a leaf blows violently in the breeze. What I care about, at the moment, is that the Russell 2000 is also not a target of the HFTs. It is a good sign the market might well be on track to remain calm in these lazy days of summer.
“As the sea slowly rolled back onto the land, the boats, once scattered about, began to float again, their angled masts once again pointing up to the sky, as if in thanks for stemming the flow of water outward and then allowing it to return.”
Like water, the market always seeks balance. Yesterday, it sought some of that. We should expect to see more here and there, at least until the market finds it place in relation to earnings and economic outlooks.
Trade in the day; invest in your life …
