2014 Ending So Are Trends

CoverRisk.com will start recalibrating trend data as this trading year comes to an end.  That goes for the risk rankings as well for AAPL, BAC, GOOG, GS, IBM, MSFT, F, PFE.  Trends have obviously been strong for the indexes as CoverRisk established long positions in February well under 2013 closing levels.

Valuations by various measures seem stretched and any selling that offsets closing year end marking could indicate January pressure.  The Fed will finally begin to raise rates in 2015 but at what pace is not known.  HFT operations will lean on downside volatility with potentially little resistance other than waning stock buy back programs.

Record S&P500 Close

S&P500 record close today.  Beating the indexes is especially hard the last couple of years and John Bogle followers believe they are proving that passive index investing cannot be beat.  But the truth be told, many of us design models which consistently beat passive indexes, including this year, even when considering the equities have been so heavily subsidized by the Fed and Treasury for at least the last 5 years.

IBM got a large dose of stock buy back today as it continues to teeter near critical price areas.  It remains number #1 in the risk ranking out of the Q8. 

 

Market Reset But IBM Near Edge

Rally squeezed every short again as hedge funds, sovereigns, and the fainthearted  were left reaching for cover in an absurdly comical play of trend rebound.  As stated here before the overall trend is still up and the explosive nature of rallies is leaving hedge fund and option boys bleeding.  Once again we see that the world is priced in equities because that is shortest distance between two points.  The first point being the slow spin downward in post WWII economic growth and the second point being what we imagine the world should be like.  One is real, the other is OZ.  There will of course be a mechanical price failure of world record proportion at some point as structural fatigue of the Fed asset price monster will collapse.  But no one has any idea when that will happen.

There is however one asset price indicator which may tell us if the deflation slow growth pig is here to stay.  IBM.  Big Blue has had a virtual price collapse and represents the structural nature of corporate operations and job growth. Though the world wants to price itself in tech and in its the narrow nature and overpriced equity values, the real world is represented still by IBM and its combination of technology, broad employment, and practical world solutions.

IBM has come dangerously close to confirming a major structural price decline according to CoverRisk.com.  A world priced in the technology of gadgets will suffer greatly if IBM falters. 

Yellen: Soccer Mom

Yellen has delivered her upside asset price spin once again.  The Fed is always caught defending stock prices, shepherding participation like a soccer mom protecting her not so talented child from the true nature of competition.  Down is unacceptable in a world where social interaction is delivered through device and applications molding negative event information into general rationalizations and framing views that some how all can be made right by simply explaining calmly why anything bad can be wished away.   Yellen, like Bernanke, like Greenspan, can never bring themselves to deliver bad news.  The vanishing middle class, a growing elite, are not the story to them.  Their view is always if you can save just one millionaire, think of the possibilities. 

Ruble, Putin, and Game Decisions

Ruble troubles making markets a bit nervous.  While Russia is certainly taking some major economic hits,  Putin is in a game decision position where he can execute strategies which have a great impact on what the western nations are most concerned about, asset prices.  His accountability rests on a different set of power rules than the west and so he can bring into play decision choices which have greater leverage when ultimately there are discussions to arrive at some compromise plan to stabilize world economic markets.

Soveriegns and Feds vs Bears

Bears bringing on the push lower late morning Chicago.  Momentum quants front running order flows keeping the offers coming for now although allegiance can be quickly turned to front running the bids.  Market shall see if the sovereign buy programs along with Fed's whatever it takes attitude is up to the task of pushing back the much smaller bears.

Oil Leaks, Markets Adjust

Markets continue to worry about oil but we shall see how much the Fed on Wednesday will be the supportive element.   After Wednesday it will be a play to see if there is a continued oil leak and just what kind of year end buying shows up.  Current retracement from the December 5th all time high in S&P500 is only around 4% while the break in October was 10%.  If you have just been lugging stock this year from the long investment side then you have little padding while absolute strategies have already won. 

Markets, Oil, and Trends

It is certainly more fun when decision strategies  are short these indexes and it appears a continued run on the downside would go hand in hand with a further sell off in oil.  To many elements of the economic engine rely on higher oil prices which simply out way any gain the consumer may get in return.  Oil is tied to business debt and some of that debt will now not be repaid.  However, being an old soybean trader, oil is entering a % decline area where no one wants to initiate new shorts.

As for the overall trend in the indexes as viewed here, the data via CoverRisk, via QRiskValue still show the trend in stocks as higher.   This is from composite decision programs which once again lead any reviewable industry model performances.  But these things don't pick tops or bottoms so turning points come after decent moves against prior trend.   Head fakes abound and year end marking is an art form with few trading days left.  Some will have to do some pricing yet and be aboard indexes currently showing big gains.   

Market's Risk vs Over Under

Passive indexers will say the market is efficient and few can beat it.  How we look at data and especially how we determine risk is the key to successful strategies.  Despite many bright folks who view the world in a macro perspective, they often under perform the market in big ways because their process depends in large part on luck.  Many of the greatest stock fund managers owe their entire success to the great secular bull market.

But a closer look at markets reveal there are few efficiencies and price discovery creates great opportunities to create excess return.  Transactional premiums and discounts in price are created to accommodate attitudes formed by bias and perceptions of future prospects.  For example, market trends are generally viewed as either over bought or under sold.  But there are examples of more complex set ups.  When looked at in terms of risk or least risk participation against over bought and over sold for 2014, here is the data.

Least Risk/Overvalued     AAPL
Least Risk/Undervalued     GS
Most Risk/ Overvalued    BAC
Most Risk/ Undervalued    F  

The natural inclination is to look for the least risk / undervalued stock but that is two easy.  AAPL for example has had a tremendous year but there are transactional elements which continue to create a premium even though it is substantially over bought.  It is always easier to effect the risk side of the equation as opposed to over bought or over sold.  As such, AAPL will probably become Most Risk / Overvalued in the near future.


Data Provided by CoverRisk.com

Crying

Lots of carping about algos as it gets tougher for a large number of participants to beat markets.  Without going into the efforts designed to magistrate the upside of equity prices by sovereigns and Fed, the main problem with non performers is their approach.  Works for a bit and then dies.  Adaptive quantitative approaches out perform year after year.

As for the general complaint about algos; what did the complainers think was going to happen?  The world is headed towards algo solutions in nearly every business enterprise.  And as for front running market information based on latency, it exists because exchanges want it to exist.  Volume transactional deals abound because markets are primarily transactional machines for price discovery.  The uncertainty of price movement creates opportunity for applications to take advantage of structural price execution mechanics.  

Algo participation can be changed by exchange rule based on viability of price.   The IEX is an alternative to place limits on latency but it will not end algo development or dominance of strategies which provide excess return in all time series approaches not just HFT. 

No Bears Left, Let's Get Short

Indexes stalling here with extremely low volume at record highs.  Not good.  Russian invasion of Ukraine an event markets will have to sort out but the global impact on financial world is a negative no matter what the Fed does.   Oil price declines are meaningless unless they go to 100 per barrel.   New power structure in Washington meaningless as always.

Takes big balls to get short this market after the straight up move of last three weeks. Ran over every bear that ever lived.  As stated earlier posts, if you are a manager with great returns and not just a long zombie, you should have been out before now.  There is no room left on the ledge for bears so, lets get short.   Best prices ever to do it. 

The Fed and Bad Paper

Major indexes have the October jobs report behind them and the market bulls will now focus on marking up prices until the year end.  Little has been able to side track the recovery from the Oct 16th lows where suddenly a curious black hole appeared and sucked up all the volatility of any price movement. This vanishing volatility clearly indicates the markets ultimately fear no downside and that every stock and any paper representing a sector of equities is protected by the belief in the Fed's ability to guarantee up.  For its part, the Fed is eager to spin the dove whenever it feels necessary since the only world metric for zero rates is the price of equities. 

 The Fed's message is one of accommodation and the resulting mechanics are transactional trade offs where chasing returns, stock buy backs, and finally, the belief in upside invincibility have produced a flood of additional ETFs and the soon to be delivered ETMFs.  While the ease of transactional variety is pleasing to investors of all sizes, the motivation is a race for market share among ETFs while creating  pseudo primary market products which have serious secondary market implications.  These creations are much like all financial engineering vehicles of the past where good paper becomes bad paper when the mechanics behind pricing fails and liquidation creates panic. 

Risk Adverse Volatility

This is a performance chart of a risk adverse stock model.  When volatility spikes on a stock with the lowest expectation in terms of risk, markets have increased downside potential.  This chart is 2008 through October 28,2014.  The spikes in volatility are all in 2014.

If Up

Volatility is back to normal as long as we remain in the bid mode.  Managers continue to pile in with the fear of being too clever by reducing their holdings earlier in the year.  This in itself does not guarantee a continued rally.  With the Fed tomorrow, whiplash will reappear for a bit and then focus on a general direction.

The break of recent past was orderly and did not have the important liquidity risk event which will ultimately appear along the ever expanding liquid alternative (ETFs) birthing.  Illiquid underlying wrapped products will cause a similar crash of more liquid alternatives as arbitrage balancing will perform its usual side step and let markets free fall to a profitable spread opportunity.  Then ETF repudiation will cut in half existing products for those which better weathered the correction.

Hey You! You In or Out?

Market had a tantrum last week and then put a con on the Fed so they would squeeze the stimulus doll into saying ma ma.   It is always a circle jerk in defense of equity prices since they are viewed as the world benchmark for economic stabilization.  Spontaneous bear implosions are all over everyone's shoes as the VIX declines into its proper uselessness along with premature declarations of this is it from noted talking heads.

All one can say about the volatility of last two weeks and the nothing for sale rallies of the last few days is it has primarily been about stupid out / stupid in action.   Huge discount now has turned into huge premiums with value lying somewhere in between.

Bears may believe they need a macro miracle to save them but their real hope lies rather in slow going down bid action until the recent lows are tested. 

Third Quarter Low Now In or This Rally Is A Set Up?

Downside crying was so loud the Bears forgot to cover.  Extreme short squeeze looks familiar as the markets reclaim old battle ground.  Steep premium over value has now has appeared but not as wide as the discounts we saw culminate when posting one week ago today.  Volatility disappeared and will stay gone if market continues to move higher.  IBM collapse being ignored as managers put cash to work and see a chance to be fully invested by year end.  Now these guys do not have a great track record but they could replace share buy backs for awhile. 

If you are an absolute return manager with 50% or better, stop here and wait for last trading day of year or Jan.

IBM Fall Not Surprising

IBM lists among the worst risk opportunities on the CoverRisk Q8.

What is Risk?

Understanding markets is tough.  Creating adaptive strategies generating excess returns year after year is even tougher. CoverRisk does it.  But because most managers, most investors, are so bad at understanding risk and how to play it, there has been an industry created in constant vigil to protect the market's upside.  This reaction to every downside event, fretting and worrying the market may have a  pathetic 10% correction shows how fragile long term investors truly are.   The horror of a 50% correction is beyond all comprehension. 

A companies stock performance now more than ever is protected through buy backs and market gaming analysts complicit in creating an illusion of value.  Legions of retirement portfolio participants are sucking onto the side of the great float boat provided by Greenspan to Yellen, Paulson to Geithner.  All holding on to notions of a comfort zone lugging stock portfolios dependent on strategies which require only that you wake up in the morning and pray great acts will appear from the Fed and Treasury.

I talk about risk all the time to a lot of people.  Most don't get it.  Most don't believe it.  Many have watched year after year of astounding gains simply complacent to be emasculated by missing great returns.  

There are two rules in life as you probably well know.  
Rule number one; it is always about the money.  
Rule number two; it is always about the money. 

Understanding risk is not just owning an investment knowing it might go down.  It is the probability that an investment will succeed compared to the probability its substitute will not.  Risk is balancing the uncertainty of an outcome with a utility comparing one thing to another.  Finding a measure where they are both equal and then looking at the probability of returns.  

Five Down Three To Go

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	96.26	16.08	524.51	172.58	179.84	42.74	13.98	27.70
Change	-1.28	0.32	-5.52	-4.66	-1.91	-0.48	0.36	-0.49
YTD	16.11	0.51	-35.85	-4.68	-7.73	5.33	-1.45	-2.93
%YTD	20.11%	3.28%	-6.40%	-2.64%	-4.12%	14.25%	-9.40%	-9.57%

Eight Stocks

Twenty thousand invested in each of these stocks at the beginning of this year gets you this.

 

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Shares	250	1250	36	113	106	541	1333	645	4274.13
On20000	4650	1188	-801	163	-401	3416	-2200	-1400	4615
									160000
									2.88%

Deep Discount

Interesting technical data appears.  Never has the S&P500, in our collective data running over 20 years, ever had such discount as to what we call riskvalue.  Deep discounts usually can be corrected consolidation or by sharp short covering rallies where pockets of nothing for sale appear.

Selloff

Markets acting scared.   Big volume, big enough volatility, and late sell off action are classic signs active participants know how to get paid.   Investors online statements starting to show decent losses with lots of October left.  As posted before,  volatility was due to appear without necessarily changing the long term trend.  But now that it has picked up, you have to rely on either deep positive trading performances, such as CoverRisk models have provided, or consider what you can tolerate.

Here is the Q8 on today's close.

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	99.81	16.40	533.21	178.77	183.52	43.65	13.54	28.47
Change	-0.92	-0.08	-11.28	-1.61	-2.41	-0.38	-0.25	-0.66
YTD	19.66	0.83	-27.15	1.51	-4.05	6.24	-1.89	-2.16
%YTD	24.54%	5.33%	-4.84%	0.85%	-2.16%	16.68%	-12.25%	-7.05%

Down to Zero or Third Quarter Opportunity

Nets being deployed for falling objects as the IMF, deflation, and creepy diseases assault stock prices.  No greater minds than those at the IMF have declared markets too high and of requiring immediate correction.  Many of the IMF members know a disaster when they see one since they have honed their prognostic skills on years of either over reacting or completely missing important events.  This time they will not be fooled.  The rich are not stupid all the time.

Markets have not become volatile yet but rather have been experiencing a kind of dull going down bid action.  And who can blame reluctant Bears since downside follow through has been rare in the last few years as the markets have withstood the push to bite down hard because of the Fed's magic powers.

Down and ugly will make those of us who design alternative investment strategies much happier because it so much easier to beat something that is at zero.  But stay calm.  The old adage from my days in the pits was the trader axiom ; the market moves the most to everyone's disadvantage. 

Bear Traction

The status of the Q8 Roller as of 13:36 CT today.          Bears getting more traction before Fed Minutes tomorrow.

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	99.21	17.02	567.00	184.53	186.76	45.69	14.17	28.94
Change	-0.41	-0.27	-10.35	-2.95	-2.28	-0.40	-0.35	-0.23
YTD	19.06	1.45	6.64	7.27	-0.81	8.28	-1.26	-1.69
%YTD	23.79%	9.31%	1.19%	4.10%	-0.43%	22.13%	-8.17%	-5.53%

Bears Run Over

Though unemployment is at new low for the move, so is job participation.   But the news was enough to create a mild slaughter again as in "to many to count" for the Bears.  They are said to be reconsidering the Death Cross signal as a way to predict the next financial black plague but are taking suggestions at 1 800  j-u-s-t   s-h-o-o-t    m-e. 

The CoverRisk data still shows the up trend in place with few signs of an end.  Deep discounts at the end of yesterday's trade in S&P500 were corrected overnight in part by attraction and the part by the ever present insider leaking we have all come to love.  If they can hack into every major financial institution, they can certainly get all the data they want from the idiots at the Labor Department. 

Weekly performance in the S&P 500 is the only positive negative in Bear talk.   There is always Putin, the Chinese, and Ebola to bet on but the last quarter of every year is a particularly tough journey for shorts.   The best rally killer is down, very fast, and for no reason.  It makes every one panic.

Bears Press for Deeper Correction

Bears finally getting some follow through on downside.   Europe, China, and some economic data seen as catalysts.   With jobs number coming up on Friday markets will find some wait and see action Thursday as they are running deeper discounts than usual before critical information.  Bear's task will be to take the market lower after a volatile Friday up/down reaction with a hard break possibly pointing to a 10% correction as opposed the usual 4% in recent years.    

Bears Want to Avoid Failure to Launch Break Again

Bears are ready.  Many bulls are ready, as in on the sidelines.  The death cross is now imprinted on the foreheads of  those who believe the crossing of the Russell and the SP500 long term trend averages is the big voodoo.  Actually, many who believe in the 50 or the 200 day moving averages have a metal plate in their head.

A good hard break would be refreshing and well predicted as of today, but those events do  occasionally coincide.   Anything which will increase volatility is being subscribed to by the active trading market participants while this year's rally has now climbed to a height where the bulls are using caution as a strategy.

 A set back to buy is what the bulls really want while the bears want death dive squared forever.
    

What Brought You Here

Stocks were doomed.

Going into the summer of 2007 everyone was long stock.  To add to waning momentum, Wall Street had already exploited all the low hanging fruit in the form of mortgage transaction fee bundles.  Unfortunately, what was left were lots of notes which would become an avalanche of failures.

The industry was near empty as it sat at the top and looking for the next big catalyst to move markets.  Stocks needed something to keep them in first place.  What they did not realize was that the next big thing would come at the end of the biggest financial failure in the history in modern times.   In absolute terms, dwarfing the Great Depression and bringing about the largest wealth transfer in global history.

So here we are in record new territory for stocks. What will kill this rally and start the next big thing?

Well the diagnosis for down is always too much up. The symptoms are characterized by an inability to slow a dramatic sell off brought on by the thing that brought you there.  And what brought us here.  Everyone might say the Fed.  But the answer may be more of a structural price function unrecognizable in form and seriously different than what our collective cognitive bias would believe.

What is the collective bias?  Probably zero rates equals higher prices for shares.   The structural price function may be the carry trade from Fed to corporations replacing broad share ownership by the public.  These record highs have less shares, less volume and are considerably thinner.          

Derivative Active Substitutes

On the horizon, changes to passive investing.  

"Pimco in May said that interest rates in the U.S. will remain lower than they had been before the financial crisis, as the economy enters a “new neutral” characterized by global growth converging toward lower, more stable speeds. The Newport Beach, California-based firm is recommending that clients consider strategies implemented with futures, options and swaps to lift subpar returns." By Miles Weiss and Susanne Walker , Bloomberg. 

To "lift" returns across all asset classes, the increasing trend will be for traditional passive management operations  to turn to trading strategy derivative firms using black box and grey alpha generators. 

Risk Is Always On

If you are an investor, risk is always on.  How do you cover that risk.  How you cover that risk is what we do at CoverRisk.com very well.  But besides the plug, if risk is off then you lack two elements of risk, uncertainty and utility.  Risk off means you have no risk and as such you are not an investor.   A trader can have risk off or a flat position, but an investor has uncertainty and the utility of possible expected returns or even better, alpha, excess return. 

 If we reduce an element of risk as to how we measure the utility it brings us, we have to look at in terms of money.  Units of money and how it is applied to become a per unit risk (PUR) function.  AAPL is a stock owned for various reasons and we need to cover risk when owning a unit of AAPL.  We also have to look at the PUR in terms of time or in this case the investor's dimension of market time which is quantified as each end of day based on the closing price.

More to come.

Just Lie There

Chances are you are a saver of stocks not an investor in stocks.  Chances are you will be assaulted by a great bear again like you were in 2007.  Investors in stocks and markets alter their risk profiles and try to not time but adjust to perceptions of opportunity and danger.  Savers of stocks just lie there.

The great creator of the Vangaud Group John Bogle is correct in that it is hard to beat the market when trying to time the top and the bottom.   But who does that.  The passive industry wants to build a straw man and declare market timers and or active managers as incapable of beating a simple benchmark stock index.  The fact is however active managers of adaptive non macro absolute return strategies beat the market all the time.   On a scaled basis they beat nearly all the traders all the time.

To be a great investor you need to rely on systematic algorithmic approaches which remove the fear of investing by consistently utilizing unbiased decisions in all market conditions.  These absolute return strategies are based on an ability to quantify the risk in terms understandable in dollar terms.  Great decisions are made on price and not the story about the stock, commodity, or fixed income product.  

Blogs and Week Ahead

I look at various financial blogs every so often if they come up by topical search.  There are a few I will look at to get a mainstream view, Big Picture, and others such as Zero Hedge to get the crazy conspiratorial almost useless view.  All these bloggers work way to hard spinning  verbiage about what they believe is going on in the markets. Great energy.

So week ahead will be about the Fed and the direction of interest rates and any Braveheart decision coming out of the UK.  Index futures have a slight negative bias at work according to our CoverRisk.com data.    Models are at all time highs and when long still have a larger long bias overall but continue to work both sides with lighter position  shorts like today.

Markets

The CoverRisk.com data continues to say the overall collective bias of CR algorithms are up and that has not changed this year since February. 

Macro strategies or star hedge fund managers have taking a beating again this year as stocks and bonds continue their march.   Large single views of a market can have big pay offs but require little talent just longevity.  Secular bull markets make money for investors but not as much as long/short absolute return strategies.

 Overall I am a bear on stocks as a sporting view against an industry supporting notions of value based on p/e ratios, multiples, and cable business news mantras.  But being a bear about the limits of promoted upside vs the algorithms which year over year pile up excess returns, I'll go with the algorithms.   When the algorithms start being shorter than longer, then stocks will begin the trip lower. 

Investing and Trading Decisions

Most professional and non-professional trader/investors do not have a clue on how to look at market data and make choices without cognitive biases rationalizing insignificant information.

Investing is not easy. Improving the probability of success in trading and investments requires having strategies which are adaptive to price direction. Shortcuts and attempts to simplify wealth management by herding investors into passive ETFs is part of a narrow approach.  Broader more adaptive algorithmic solutions improve the probability of success.

The lack of success of most investors is due to perceptions of risks and misconceptions on how they apply to investments. Most investors are risk adverse. They would rather avoid a loss than seek a gain. Most investors act as if small risks are the same as big risks. This near proportionality identifies the flaw in modern portfolio theory where notions of market efficiency expose investors to large downside events.

Stock and Interest Rate Markets

Where are we.  Stocks, interest rates. 

Still uncharted territory as far as Fed intervention.  Bears in both markets have been repeatedly face planted and have had to rely on global macro events to rescue them from bull charges.

Somethings are obvious however and consumers have developed a supported bias where they perceive the future economic world to be one full of jobs that don't pay.  Economies of declining opportunities blunted by advancing technologies reshaping traditional employment.    

Random events will intersect at the point of where investments seeking return will reach well beyond where risk has value.   

Volatility like 2011

There is a similarity between our strategic model performance currently and that of the same period in July - August 2011.  In 2011, the SP500 had started out at 1253, ran up to 1373 in the first week of May only to fall over 21%  to 1077 into the first week of August.  While the volatility is not nearly as dramatic as 2011, strategic model performances can pick up patterns in price discovery where chart patterns look comparatively different.  

The pick up in recent volatility may have to do with the potential significant impact anticipated from the Jackson Hole conference stating August, 21. 

Back in 2011, the market had rolled over and was gaining downside momentum.  Bernanke's speech from the conference then was the hand tipping in front of the Fed's September move in what would come to be known as Operation Twist.   And while the markets initially reacted negatively to OT, new lows (1068), that low became the foundation of the current rally. 

Yellen is facing a different market with much higher price levels in the SP500, yet she has used much of the same dovish analytics as Bernanke did back in 2011.  Rates at that time had just fallen to around 2% in the 10 year so the game of choice in yield then as now favored equities. 

Look for volatility to pick up with swings from one end of the range to the other beyond Yellen's speech.  Direction will come in October.

Where you should be on your investment return today?

Markets have been tentative with a big bear tease going on since July 24th.  Global events beating up the bulls but any good news brings in short covering.  The underlying bid has been there just like the past which shows continued interest in owning the Bernanke/Yellen carry trade. 

Hedge boys continue to have tough time in general. 

So where should you be on each $20,000 slice of your investment equity index pie; net +30% to +45%.

CoverRisk, the business arm of QRiskValue and this blog says that it where you should be, not much different than the last 6.5 years.  

Q8 Latest

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	95.12	15.00	565.07	169.42	187.10	43.08	16.87	28.41
Change	-0.47	-0.05	-8.08	-2.27	-2.54	-0.29	-0.15	-0.34
YTD	14.97	-0.57	4.72	-7.84	-0.47	5.67	1.44	-2.22
%YTD	18.68%	-3.66%	0.84%	-4.42%	-0.25%	15.16%	9.33%	-7.25%

Q8 once again has 4 of the 8 stocks lower on the year with GOOG hanging on.

Only two of the Q8 currently underwater though 2 others just hold on the upside. 

Bottom section shows where buying $20,000 of each of the Q8 last trading day 2013 would be as of today.  CoverRisk looks at segments of the market in terms of per unit risk margin or capital. Site soon available to non subscribers.

Rally Problems

Five out of the eight stocks of the Q8 are now lower on the year despite the S&P 500 on all time highs.

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	91.81	15.51	549.91	168.96	183.58	41.48	16.78	29.55
Change	-0.38	-0.14	-3.46	-0.90	-0.02	-0.17	-0.05	-0.16
YTD	11.66	-0.06	-10.45	-8.30	-3.99	4.07	1.35	-1.08
%YTD	15%	0%	-2%	-5%	-2%	11%	9%	-4%

VIX Bear Action

VIX on the monthly charts is currently at the third lowest closing point since January of 1990.  The VIX is never really good at measuring anything other than bear stress levels.  It does demonstrate the out of selling ammo condition the market seems to experiencing.   Going up lightly offered is the current mode with inter day selling coming from option maneuvering into the futures as well as some hedging positions.   Otherwise don't under estimate the damage that has been done to the option environment as every downside reach point and all upside readjustments have been re scripted.   Little priced now for a no net circus accident. 

Q8 June 5th

Q8 Latest Performance as of 14:15 Central

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	645.96	15.44	554.86	162.96	185.96	41.15	16.67	29.74
Change	1.14	0.23	10.20	0.57	1.45	0.83	-0.13	0.10
YTD	84.94	-0.14	-5.50	-14.30	-1.61	3.74	1.24	-0.89
%YTD	15%	-1%	-1%	-8%	-1%	10%	8%	-3%

Markets Inching

Over the coming years, the Bernanke and Geithner era will be studied as much for it failures as it will be for its successes.  One cannot help but feel they have unleashed a mechanism distorted by the carry.  A constant supply of money turned into risk capital as returns needed to beat inflation and competing fixed income benches have a extremely low bar.

Markets are always unpredictable and the mechanics in place are rarely perceivable.  Current daily low volumes and ranges remind me of years ago in the pits where the adage was never sell a quiet one.  No one is sure of the score on that rule but quiet moves inching on daily new highs or new lows usually explode into wild stop-loss ranges.  Reversals dwell on those explosive days and just when victory is claimed from the momentum side, the battle is lost.

QRiskValue Ad

Q8

The Q8 stocks which QRiskValue covers as of this AM.  Indexes on their highs but five out of the eight stocks are down on year.

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	636.95	15.19	558.80	160.13	183.14	40.39	16.45	29.59
Change	1.57	0.04	-1.28	-0.61	-0.62	0.05	-0.09	-0.02
YTD	75.93	-0.39	-1.56	-17.13	-4.43	2.98	1.02	-1.05
%YTD	14%	-2%	0%	-10%	-2%	8%	7%	-3%

Billions of Tiny Gambles

All of the reasons given for the equity market upside;  corporate buy back programs, the Fed's forced carry trade to equities, and the always clever "wall of worry" theory, all have played a part in the rally.  This may be news to the cable business programs searching for what we may have missed, the world is long stock.  Professionals may be less enthusiastic but they are long too.  Additionally, the proliferation of almost every form of financial product made available to institution and retail customers, from ETFs to alternative liquidity mutual funds, have at their very nature a means to execute, every so cautiously, a long bias.  Their design has created a false sense of security for all investors that somehow their ability to easily scale active participation some how allows them to cheat risk.  Billions of dollars in tiny gambles based on the notion of being able to move about in contrived market liquidity is still subject to exit event mechanics.   Liquidity in joyful upward direction is different than liquidity in exit mode.     

Zombie Longs

Stock market continues to the upside.  Low volume low volatility adds to the creepy conditions as the hum of the walking has set into the daily action.  Like being trapped in a room where the ceiling and wall are moving in, mindless equity positions pile onto the already living dead who entered these markets long ago.  There is no cure for the Zombie Long.  A federal reserve marches to accommodate soft metrics for the larger economy but only sparks the equity balance sheets of a tiny percentage of the country.  Yellen, like Bernancke, unwilling to admit their complicity in enriching the elite, for who else would they dine with.  A weekend reading of Tim Geitner's self serving book is really an insight into his success in producing obscene entitlements for high corporate standers  while the rest of America was left without upside. 

The Zombie Longs are suckers for the top.  Unable to turn around quickly they are the foils for any downside event.  They will keep on coming no matter what happens.

Current Crash Values

Where the crash will stop according to QRiskValue.

SP500  1372
AAPL   357
GOOG  638
IBM      111
F            12
PFE       24

Bad Is Good And Real Bad Is Better

Russia plays with Ukraine, markets get defensive, but bet offensive.  Buffett says he would not get out of stocks.  He is a buyer and the thirty talking heads agree.

 According to the bulls, there are very few reasons ever to sell stocks.  Every event is an opportunity.  Since the Ukraine is burning on the edges, all benefits come to the Wall Street.   Sell emerging market and buying U.S is compelled because everyone is protected by the Fed and a giant complacency of epic mindlessness. Forget the enlarged mass of tangled interconnected long bias positions established both in fixed income and in equity markets since March of 2009. 

This U.S. market stands one liquidity event from disaster.  It is inconceivable that a purge of financial engineering might be looming as a potential liquidation event could lead to downside velocity where all correlations are lost and buyers step aside.

But never pass up an opportunity to get in there and really experience the thrill of buying breaks.      

Google Stall Speed

Stall horn is beginning to sound on the flight of Goog.  For those who have climbed into big white fluffy clouds and stalled an aircraft during training there is an extra disorienting feeling added to the fall off of the aircraft before correction.  Google may be just heavy enough however to fail to correct itself before falling to levels substantially lower than its current price.  Now the forever faithful union of fundamentalist who always tout the earnings, growth, and multiple blah blah on every stock from APPL on, it does not matter, stocks fall regardless of their good news.  Just try to convince anyone of the merits of a stock's fundamentals as it is in free fall.  Data is the same but the flames dissuades all potential buyers.   In fact, Google currently has to same technical overload as AAPL did last year when on its all time highs.  APPL came with in 85% or its crash value of 378 in 2013.  For Goog to do the same it will break some 476 from its 2014 highs.  Crash values provide by QRiskValue.com

Continued on Trailing Risk

No matter when you traded markets, in the 80's up through today, the greatest marginal advantage made all the difference in being successful.  In a pit standing right next to a brokers bid and offer or, for awhile anyway, next to the exchange server's broadcast bid and offer.

The great rush to quant trading operations was ultimately not that they would  make so much more money, although I am sure they believed it, but rather that those allocating trading capital would hopefully view quant expertise as the only way to reduce risk exposure in a trading world made flat and edgeless by connectivity.

But the nature of risk is to be misunderstood almost universally.   It is true the more time a position remains exposed requires a greater cost in covering the greater possible negative outcomes.  HFT seemingly reduced that risk by speeding through all the elements and squashing the measure of time down to almost nothing.  Catch me if you can if you will.  But the spiraling failure of quick time to capture greater returns shows the greatest marginal advantage in HFT ultimately loses to the performances of the gma in longer time, less transactional strategies.  Great returns come from strategies that  cover greater event horizon risks because of the increased probability of catching significant returns from extended market moves.      

Trailing Risk

As a floor trader in the early 80's, I experienced the jostling arms raised hysteria of market making.  The anxious close proximity to price discovery scribbled down on trading cards while impatiently looking to confirm  trades with other traders nearby or across the pit.  Laughing out load sometimes at the sheer idiocy as bodies colliding in pressing motion to a  collective scream  of "Sold".  

Back then we viewed risk as the thing to minimize so we would not have to put any more money in our margin accounts.  Get the edge, don't be stupid.  Move up in size and use the same rules.  But we all marveled at the shooter.  The big traders who stepped out, no net. Later it became clear many shooters with bid and offer size bravado were hiding quiet trades the rest of the pit never saw.  Bag men.

Of course the pit shooters died with electronic trading, no where to steal an edge.  Now naked out there and looking as stupid as they really were.  No real talent.  

The search for an edge was passed from the early neanderthal shooter to the nerd geek high frequency sneaks listening to the pipeline of bids and offers passing from exchange platforms into computer sniffing algorithms ready to front run all the brokers on Wall Street.   May be the dumbest of all trading species.  But even the brightest of of nerd scholars abandoned great theory about risk and price construct to focus on front running since random price action seemed too hazardous to their genius image.  The blasts of 1997, 2000, and 2008 forever humbled risk harnesses, efficient market theory, and all option theory.  

To be continued.