WASHINGTON, October 15, 2014 – It’s a bad day for the Maven today as he tries to file his tax return before the ultimate filing deadline today while simultaneously directing a virtual fire hose at his fire-consumed portfolio.
Stocks themselves have descended into the bowels of hell this morning, with the Dow initially down well over 300 points before bouncing back up again to -250 or so. As of 12:15 p.m. EDT, however, the flames of hell have come back for another round. It’s getting hot out there for investors, and not in a good way.
(UPDATE: The Dow was off a massive -406 at 1:00 p.m. EDT.)
CNBC, which occasionally does contribute some insight when not giving air to the latest rich shill who’s touting his book, has at least one plausible explanation for what’s going on today, aside from Ebola, ISIS, the oil price collapse, and the dithering Euro-elites who understand precisely nothing about anything except their own wealth.
In short, CNBC writer Alex Rosenberg has spotted one major culprit in today’s collapse: a stunning lack of liquidity.
Investors are blaming an unprecedented lack of liquidity for Wednesday’s gut-wrenching stock market open, which saw the S&P 500 fall as much as 2.2 percent from Tuesday’s close, sent the VIX screaming to 28 and led to outsized moves in major stocks like Disney.
According to Eric Hunsader of Nanex, there were 179 “mini flash crashes” during the first 15 minutes of trading, which is the most since the Knight Capital Group fiasco in August 2012. Additionally, Hunsader reports that there were 68 trades in the S&P e-mini that moved that key futures contract 3 or more ticks. And Treasury futures, too, moved sharply as a result of low liquidity….
‘There was no liquidity at all, so it doesn’t take a whole lot of size to really move the price,’ Hunsader told CNBC. But ‘some people come in, and they’re used to buying or selling X-amount, and they’re not paying attention. And X-amount now causes significant movements in price.’
At the time this issue was trying to resolve itself, nearly every individual and a great many institutions have simply been trying to get out the exits at any cost. And without buyers, each trade cascades downward, many with considerable violence. According to Hunsader,
‘This was a pukage. People were putting in market order to sell on the open—”Just get me out”—without thinking,’ said Brian Stutland of Equity Armor Investments.
The issue, Hunsader said, is that high-frequency trading creates the appearance of liquidity. He gives the example of a trader who wants to buy 10,000 shares of a stock.
That order might get routed to two exchanges, but instead of the order getting completed with 5,000 shares traded on each exchange, the first trade of 5,000 shares will cause the other 5,000 share offered on the other exchange to dry up.
When these are market-order trades to buy or sell at the available price, the effect of this is a ricochet effect that leads to an outsized move.
In other words, the other side of the trade can be a mirage, except the average retail trader/bag holder has no clue.
What we find interesting is that this explanation is pretty close to the likely truth for a change. But our question is this: Aren’t all these nice HFTs supposed to be doing us a favor by “providing liquidity” to the markets? How, then, with all the HFT trading in action over the past week, do we find ourselves lacking in the liquidity they’re supposedly providing, thus justifying their piratical existence?
Stumped? So are we. But not really. We’ve known all along that the HFTs’ liquidity excuse is just that: and excuse. An excuse that keeps roiling the market and making it incredibly unsafe for small investors to tread.
The liquidity problem is complicated by the fact that this is the month that the Fed will allegedly end QE3, a program whereby money has been printed by the trillions, given to large institutions and rich 1%ers to trade the market up, and ultimately allow the fat cats to regain their lost wealth at taxpayer expense.
It’s arguable that this fake money has caused a fake rally over the last 2-3 years. But now, as the fake money is being withdrawn, perhaps the market’s potentially fake prices will now decline to where the would’ve been without the fake money.
In the meantime, the average American hasn’t benefited one whit from this, which is why the entire operation may very well fail in the end, leaving us in a 1937 style recession—the one that was caused by tightening money encouraged by the Roosevelt Administration when it had just won re-election in a landslide by convincing the electorate that they’d beaten the Great Depression.
The result was that the economy quickly slipped back into failure mode.
The error this time around was that rich individuals and big corporations and banks were made whole at taxpayer expense, while taxpayers themselves–including small mom-and-pop operations that are responsible for creating most of America’s jobs—have been languishing for six years and counting, thus creating a stagnant job situation along with stagnant wages.
Obama and the Fed have thus far been quite successful in restoring lost wealth to their already wealthy backers. But John Q. Public has largely been ignored, not to mention fiscally oppressed by the increasing horrors of Obamacare.
The next act could be really ugly. It will be interesting to see if the prologue unfolds in this November’s elections.
Today’s trading tips
One major tip: stay away if you’re not already in. If you are in, be sure to balance your portfolio with enough short ETF ammo to protect your holdings until the storm blows over.
If the Fed is somehow forced to open another round of QE, or whatever they will choose to call it, it might be time to dive back into some gold or gold ETFs. The yellow metal and its friends silver, platinum and palladium, have all been smithereened by the stronger dollar lately—a dollar move encouraged by the ending this month of QE.
But, as we’ve indicated, if the Fed has to back off on its return to normalcy and try to inflate things again, gold and its friends will get a powerful tailwind. But we shall see.
In the meantime, the trend is your friend. Since the trend is down, be very cautious, and stay hedged if you, like the Maven, are still in the game. Everyone is getting hurt here pretty much. But if you can stay afloat and keep most of your investment funds intact, there’ll always be another day to play, and mass quantities of mass bargains with which to stake your next bets.
Meanwhile, we’re going to try to finish those tax calculations today, complicated as they are each year by real estate and by late-reporting master limited partnerships (MLPs). We’re not quite ready to jump out the window yet, so likely we’ll return tomorrow to report either the body account from today’s action or, perhaps, a snapback rally from oversold conditions. You never know.