The S&P 500 chart is giving an impression of an imminent drop because of a failure to maintain the recovery that started after the opening gap on April 25. Is the breakdown real or a head fake to be blown away by the HFT (high frequency trading) robots. A decade ago, computer-driven, warp speed traders didn't even exist. Now they make up about 55% of all U.S. stock trading and a rising share in derivatives markets. Computers can now receive and send trading information in the span of 10 milliseconds. These robots don't know what they are buying, all they "know" is how to exploit fleeting, microscopic price discrepancies in stocks on different exchanges. They are oblivious to which company, what it makes, or what human investors think about the stock.
For the bulk of stock transactions, buy and hold is dead. Michael Hudson, former economists at Chase Manhattan Bank, has data that shows, because of the growing influence of computerized HFT, the average holding period for any particular stock in the US is a mere 22 seconds. While some US$4 trillion is traded every day in the forex market, the average foreign currency trade lasts 30 seconds.
Have HFT computers taking advantage of microscopic price discrepancies made technical charting obsolete? Perhaps. Stock charts are driven by much different forces than before the Internet and computerized high frequency trading, at least over the short-term. Currently, the S&P 500 chart below is giving the impression of an imminent drop, because of a failure to maintain the recovery that started after the opening gap on April 25. Is it the real thing or a head-fake of the HFT robots?
Before one bears up too aggressively, a cautionary tale. On February 27, 2007, the S&P 500 fell hard and as a result SPY lost near
4% in a single day. It then continued to slide in a more
orderly fashion, attempted to recover but dropped again. To chartists at the time, this was confirmation of a bear move, the start of a new downtrend, or a pending
collapse. What actually happened however in the months that followed to June 1, 2007 was that the S&P 500 not only recovered, it made a new high, badly burning the shorts. This cautionary tale is one of many that warn against the futility of day trading or short-term trading off HFT distorted charts.
If trading off short-term charts is becoming a doomed activity (because everyone attempting it will lose money), what about the so-called fundamentals subject to human cognitive dissonance?
Era of Feigned Cooperation in Handling the European Debt Crisis is Over.
The results key elections in both France and Greece are in, and the implications for further deficit/debt reduction cuts from austerity are not market friendly. Both the S&P 500 futures and the Euro tanked in overnight markets as the election results came in. Socialist Francois Hollande won the French Presidential election beating incumbent, Nicolas Sarkozy by a count of 52% versus 48%. Hollande's pro-growth platform, which includes increased spending and higher taxes, clashes with the German-led Trioka for fiscal austerity in controlling the region's debt crisis. Further, Greece's polls raised doubts the new Greece government will be able to implement further spending cuts as the country is crippled with austerity fatigue. The conservative New Democracy (ND) and socialist PASOK, which have dominated Greece for decades, are seen falling short of the 151-seat threshold needed for even the most fragile majority in parliament. Greece must continue with austerity in order to maintain bailout agreements negotiated with the International Monetary Fund and the European Union. Even German Chancellor Angela Merkel's conservatives are in danger of being ousted from power in the German state of Schleswig-Holstein after her party suffered its worst showing since 1950 in a local election, boding ill for another local election next Sunday in North Rhine-Westphalia, Germany's most populous state.
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Source: 4-Traders.com: EUR/USD |
As a result, investors will be downgrading their hopes for a meaningful improvement in the Euroland debt situation anytime soon, meaning that the pressure for additional countermeasures from the ECB is about to significantly intensify as the Euro as well as Euroland bank stocks take another beating.
U.S. Employment Numbers Suggest U.S. Recovery is Again Sputtering
The latest non-farm payroll numbers in the U.S. were disappointing, as were April retail sales. The Citigroup Economic Surprise Index is showing a repeat of 2011, i.e., a rapid reversal from positive economic surprises to negative economic surprises in the U.S. economic numbers, and that is before investors have to deal with the so-called "fiscal cliff" looming in the latter part of the year.
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Citigroup Economic Surprise Index: Hat Tip Pragmatic Capitalism |
Thus market perceptions about the so-called economic and earnings fundamentals have taken a noticeable turn for the worse, less than three months after the second ECB LTRO tranche showed the promise of perhaps, just maybe having taken Euro bank liquidity and solvency risk off the table. In fact, as its detractors noted at the time, the loans were but a band-aid on the ongoing crisis.
Look Out Below
The bottom line for global equity markets including Japanese equities is that investors will need to see further crisis management from the Fed, the ECB and the BOJ before being convinced to bring some market risk back to the table, meaning the global consolidation in equity prices is not about to end soon, and could get worse as ostensible support lines are taken out by the bad Euroland election news and negative instead of positive surprises in the U.S. economic data.
JPY was already beginning to re-appreciate as traders viewed the BOJ's latest asset purchase program as too timid while expectations in the U.S. are growing that the Fed will have to follow the expiring Operation Twist at the end of June with something at least or more credible, and, as previously stated, the ECB will be under intensified pressure to apply more band-aids now that the political will for structural change has wilted under the ire of voters being asked to take the austerity sacrifices to keep the IMF and investment bankers happy.
The next stop on the
downside for the Nikkei 225 looks like around 9,000, with the international auto, electronic and machinery stocks seeing the most enthusiastic buying from foreign investors bearing the brunt of the selloff.
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Nikkei 225 Index |