According to a survey taken by JP Morgan the greatest risk to quantitative strategies is not a sharp increase in rates or poor economic data but rather a collapse in liquidity.   According to the Bank, “people know this is happening, it is not just a theory but nothing is being done about it.”

JP Morgan did not state the reasons for the collapse in liquidity but is concerned such is a systemic risk to the markets, a clearing house or ETF sponsor.

PIMCO the giant bond firm made a similar statement yesterday stating liquidity in corporate bonds is drying up just when the market needs it most.  PIMCO commented patchy liquidity is a legacy of post crisis regulation that has thwarted banks’ ability to hold inventory.  With dealers less able to warehouse risk to help investors ride out tough conditions trading has become “more frictious.”

In my view the volatility on Monday and Tuesday are great examples of the rising liquidity crisis.  At the close on Monday it felt as the NASDAQ was going to plunge another 3%.  Conversely at the close Tuesday it appeared the Dow could have added another 500 points.

Unfortunately change/reform will only occur after a crisis and this change/reform will then become a primary cause for the next crisis.  I point to the lack of liquidity, the result of Dodd Frank as recent evidence of this view.

Commenting about yesterday’s market action, the averages again advanced on optimism Mexican tariffs will be avoided.  Oil officially entered into a bear market defined as a decline of 20% from its recent high.  The issue at hand this decline took about 10 trading days.  Wow!

Last night the foreign markets were mixed.. London was up 0.41%, Paris up 0.34%  and Frankfurt up 0.21%. China was down 1.17%, Japan down 0.01% and Hang Sang up 0.26%.

The Dow should open nominally higher on the prevailing view of a more dovish monetary policy.  The 10-year is up 8/32 to yiled 2.11%.

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.