Equities were unable to rebound from yesterday’s selloff. As widely noted, Friday the Dow overcame a 400 point decline trading in a stunning range off 550 points from trough to peak. Technologies were hit the hardest with the NASDAQ down over 3.5%, the result of their reliance upon trade…i.e. China…for sales and production. The Dow was down about 2.3%.

A major issue at hand is the popular technology driven trading strategy that mirrors volatility. In a rising market, volatility measures fall and such funds add to stock positions often utilizing capitalization as the only metric. In a declining market, volatility rises and so does technology driven stock liquidations.

A major issue at hand is the only two times that this strategy was nominally stressed tested, the testing failed miserably.

Last week I referenced a Moody’s report stating one of the greatest threat is a liquidity mismatch…selling overwhelms an ETF sponsor’s ability to meet liquidations. Positions cannot be sold, cash reserves are exhausted and emergency credit lines are fully extended to meet demands.

As widely noted the Treasury Department called the largest banks on December 24 asking if the banks were suffering any liquidity issues. All answered no.

A recent Federal Reserve report indicated that credit lines to “algorithmic and other technology based trading firms” were extended over 80% at year end. Wow!

In years past, credit/liquidity crisis were caused by banks curtailing and then calling in their respective lines of credit. I vividly recall Drexel Burnham, Long Term Capital Management, Enron and MF Global. These marquee named firms imploded creating a systemic risk.

The recent selloff is benign in almost every manner, specifically volume. According to Bloomberg, “volume is still far lower than in October, November and December.”

Several weeks ago I referenced another Bloomberg report stating the volume of the recent advance was also lower than past advances, interpreting the environment as one of lacking conviction.

I cynically ask will FOGO replace FOMO?

What will happen today?

Last night the foreign markets were mixed. London was up 0.83%, Paris 1.03% and Frankfurt up 0.47%. China was down 0.69%, Japan down 0.59% and Hang Sang up 1.50%.

The Dow should open moderately higher following the Administration’s comments that trade talks will be “very successful.” Oil is up about 1.5% on reports that several of its pumping stations were attacked by drones. The 10-year is off 4/32 to yield 2.42%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.