WASHINGTON, May 3, 2013 – We’re doing another afternoon edition of the column today, partly due to a heavy editorial load and partly due to bewilderment when it comes to this increasingly nutty stock market. We’ve been playing it rather conservatively and so far, it seems, the risk-takers may be getting the better payoff. That said, we’ve begun to see the kinds of headlines that really scare us. Typical is Pete Najarian’s observation on today’s markets, summed up by an optimistic CNBC headline writer in the following head:
That’s not quite what Pete said, of course, but it’s the job of headline writers to stretch the truth a bit to snag the unwary reader. The actual online CNBC article began like this:
“’The one thing I would point out, though, when you look at the volatility of the market, this is something we hit on all the time,’ he said. ‘But it is not telling us anything about fear to the downside…’”
Najarian has yet to see high enough volatility to get nervous, to the point where he’s ready to say, “’Wow, I think everybody’s stating to run to the exits, and it’s time to get out.’”
Problem is, Najarian’s headline writer is a leading negative indicator. Braggadocio-style headlines like this are a scary movie for us. When headline writers at financial new sites start proclaiming some flavor of “This time, it’s different,” it’s time to at least consider heading for the exits. Our services are all demonstrating to the Maven that there’s plenty of selling going on beneath the hood, but nobody seems to detect it. The likely reason? “Dark pools,” which we’ve trashed in this column before.
“Dark pools” are essentially invisible cadres that transact stocks purchases and sales among themselves without the public ever getting to see what’s really going on. Along with HFTs, which routinely generate tons of bogus trades to lure smaller investors offsides and into bad trades, dark pools are another significant reason why markets are getting more and more opaque and why smaller investors and some 401(k) pools are getting fleeced. Daily. If you can’t see what’s really going on, you can’t react to it in real time. Only when it’s too late. Which is what the 1% loves.
We’ve been forming a theory of late that daily trading volume is, in fact, not at historic low volumes as many writers and financial sites proclaim. Rather, the Maven is beginning to believe that trading volume is actually at near-normal levels. It’s just that we can neither see it nor log it into the statistical database at the end of the day as much of the action is either misleading or bogus (HFTs) or is occurring out of sight and out of mind (dark pools).
Thus, what we’re actually seeing and betting on may not actually reflect current reality at all. HFT computers and dark pool players know this. By putting their own stats together with publicly available trading stats, they can sketch out the real market picture in a New York Minute. But the Maven and all the other little guys cannot.
Where’s the SEC in all this? With their collective heads in the sand, that’s where. Contrary to the popular myth, most of the rich dudes trading in New York and other financial centers—card-carrying members of the 1%–are Democrats, endorse Democrats, and heavily donate to Democrats. Democrats, in turn, are beholden to this significant cadre of one-percenters for their continued survival—i.e., campaign donations.
Thus, we have the essence of crony capitalism made all the worse by the fact that low-information voters, who now seem to be a dominant force in the electorate, have been convinced, likely for decades, that it’s the Republicans who are in bed with the fat cats. It’s a brilliant ruse, and somehow, now Republican has yet been able to dissuade the low info people that the electorate has things exactly wrong when it comes to which party is actually screwing them.
Which gets us back to our un-transparent markets. Why would SEC staffers, or anyone else for that matter, want to make trouble with the fat cats who’ve set up their massive game of invisible off-track stock market betting? All these govies have visions of making that lucrative move to the private sector after they’ve put in their 20-25 years and have laid claim to their fat Federal pensions. So why would they want to piss off their potential employers.
So this crony capitalist velvet underground of invisible buying and selling continues, rendering all the charts and calculations in the world useless by most measures. We’re doing our best to fight this, but it’s a little bit like trying to fight that invisible and elusive Predator of Arnold Schwarzenegger movie fame. You can’t hit something you can’t see.
And that, in a nutshell, is what’s been going on lately. Sure, the Fed’s endless money printing is juicing the market. But the fat cats are now pulling back their positions under cover. All it will take is one little headline slip—or a bigger one—to cut the knees out from under this market. It’s just that we don’t quite know when.
So the one thing you can do on a day like today, or what’s left of it, is lighten up on profitable positions. Looks today like our beloved utilities and the utility ETF XLU are under continuing pressure. So, regretfully, with roughly 15% profits in both, we’ve just pulled our positions in XLU and in multiform utility play UGI (symbol is the same). We’re also getting nervous about some of our REITs, but still want to grab the dividends before we run.
We’re trying, yet again, to put on small short positions via the molasses-like inverse S&P 500 ETF (SH) and the more volatile double inverse S&P 500 ETF (SDS). If the market finally starts to tank, we’ll load up on more of these. Unfortunately, thus far, when we’ve taken these positions, we’ve eventually had to pull them for a loss.
Umm, but maybe this time is different…
Even though it seems incredibly stupid at the moment, it’s time to get lighter. You cue was that CNBC headline: “Market showing no fear.”
Like they say in those horror movie trailers, “Be afraid. Be very afraid.”
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He intends to nibble on the preferred stocks mentioned above as the occasion warrants.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
Follow Terry on Twitter @terryp17
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