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.

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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.