14 May AN UGLY DAY
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%.