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%

kent
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.