09 May MARKETS WHIPSAWED BY TRADE TALKS
As widely accepted the markets are now dominated by algorithmic and technology based trading. The SEC has stated that over 90% of trading is the result of technology based trading, comprised of about 60% to 65% algorithmic and 25% to 30% indexing and forms of passive trading.
Thirty years ago, in a room full of 100 analysts, 99 were fundamental analysts and one was a technical analyst. Today the same room is filled with 99 programmers and one fundamental analyst.
It is because of this massive change in market mechanics that emphasizes speed and cost of execution over liquidity and capitalization is why many iconic market participants [Soros, Drukenmiller, Gundlach, etc] have stated the markets are imbalanced. It is also a major reason why almost every investing strategy has failed except indexing.
Yesterday I referenced a Bloomberg wire story stating that at one point on Tuesday 89% of all NYSE traded companies were down eclipsing the recent nadir reached on December 24, 2018.
The S & P 500 is sitting on a technical precipice following the rather innocuous 2.1% decline. This benchmark is nominally higher than the 50 day moving average and many “technicians” believe if such a level is broached; a 15% to 20% decline is possible.
These technicians are using the October and December selloff as partial evidence of their view.
I must emphasize the above comments have nothing to do with economic reality. At some juncture, as with every other “fail safe” trading strategy known this one too will fail. The question at hand is the underlying damage that might occur.
Commenting upon yesterday’s market activity, markets were “whipsawed” by trade headlines. I rhetorically ask what happens if a negative headline is published that creates a cascading market event, similar to a flash crash but only on steroids? Unfortunately it might take such an event for any meaningful change in trading mechanics to occur.
Last night the foreign markets were down. London was down 0.21%, Paris down 1.11% and Frankfurt down 0.73%. China was down 1.48%, Japan down 0.93% and Hang Sang down 2.39%.
The Dow should open moderately lower on trade concerns. Geopolitical tensions are also rising from North Korea to Iran, the later of which is now beginning to nominally impact oil prices. As noted many times, there is the lack of a geopolitical premium in crude prices. The 10-year is up 8/32 to yield 2.45%