Working On Correction

SP500/NQ100 working through overbought conditions based on QRiskValue.com oscillator.

Bears Push

Sovereign debt is certainly the Bears friend these days. In 2009, the Bears were continually run over each time a headline expressed doubts about the overall US economic recovery. After a quick dip, the Bears were crushed by the resumptive upside march. Now that headlines over US unemployment and world finances are being flagged each day, a new desperation over the health of the entire world economic plumbing has become the energy for the Bears big push.

But some structural elements are a problem for these markets and its participants. Traditional investment approaches, (anyone who has a 401K), have proven to be broken models and ineffectual vehicles for building equity. Investors have apparently resigned themselves to being hosed by the great transactional circus emanating from Wall Street as they pile into sector crap. But do not underestimate human blindness. One could put adaptive alternative alpha performing models right under the noses of just about everyone and they would still choose the join the legion of dopes haplessly sliding into poor performing investments. Misery loves, well misery, and nothing gives more grief than being upside down in your investments. Like, owning a home which is worth as much or less than it was ten years ago or holding the largest portion of your retirement in a 401K.

UPP INDEX

QRiskValue's Upward Price Propensity chart looks at what QRV's price internals are saying about the strength of the underlying benches.

Ordering Chinese

This blog has written several times about the China hype and the downside to great expectations. China has been presented as an endless source of demand and labor, but here is a story about Japan's current dilemma.

Hemorrhaging Oil and Economic Confidence

This oil eruption in the Gulf represents another example of how corporations of great wealth can lead us into disaster. This seemingly unstoppable oil hemorrhaging seems very similar to the confidence bleeding occurring as a result of the current economic crisis.

The great trading houses are now revealed to have no real insight into anything other than the ability to be a huge dating sight for large money changing which is about keeping the money running in order to keep transactions churning. The model is everyone involved gets a piece of the transaction of a bad trade. It has nothing to do with price discovery and everything to do with investment managers herding vast sums of money into pathetic returns.

A thousand point dinger in May was in part about two trading worlds, one rapid, one chicken, colliding at just the right time. But it was also about the underlying confidence that has been ebbing out of the markets. When I walked onto the trading floor in the early eighties, the seventies inflation fires were being battled and would become the single great struggle of the Fed as it ultimately became the great enabler of giant value distortions because of its dependence on a view that every economic downturn could be avoided by continually easing rates to accommodate bad judgment. Now we stand at the absurdity of zero rates and twelve hundred dollar gold. The first representing the ultimate battle against deflation, the latter a classic example of how mass investment plays become driven by fools.

Regulate The Talentless

Trading can be scary at times. Price discovery is not just for the upside as Fox Business and CNBC have delivered it. For an extended period of time leading up to the correction phase beginning after the 2007 highs, bulls ran around with flag waving zeal talking about new economies and hot over concepts about free enterprise and the beauty an American economic miracle spreading through out the world. Free enterprise is code for corporate welfare where government subsidies have now found their way into financial institutions whose pursuit of unprecedented compensation resulted in the need to create a pubic lending tree for those most private, if not most irresponsible, legions of talentless financiers populating Wall Street.

Now new rules will be implemented by the SEC around S&P 500 stocks which will result in the installation of circuit breakers to halt trading on any stock which moves10% in 5 minutes. This may work, but may need some tweaking. The futures markets, born in Chicago, have done an exemplary job for decades. Mark to market, here is the money. But that has always been too transparent for Wall Street because they need to transact in a world profit margins were greater because of the very nature of the cloudy product or deal.

The biggest problem for the markets is letting financial institutions remain virtually unregulated to trade mystery financial concoctions.

Down Is Out

The great outrage and now search into the reasons for last Thursday's stock plunge is all about a correction long overdue and the collision of two trading architectures. Placed side by side, electronic trading systems are able to take advantage of legacy trading structures left in place for the benefit of specialist and floor traders who are the primary owners of traditional exchanges. As for volatility, veteran traders have all been witnesses and or participants in the past when particular markets had quick violent down drafts. They are unavoidable but apparently harsher when trading structures cross and allow, in this case, the speed of electronic trading to hit all available bids and offers.

The other element of the of Thursday's death dive was about a thirteen month rally where bears for months repeatedly tried to work their angle only to be mowed over my countless late session rallies. Then, in a series of events magnified by the rumors of a sovereign debt contagion, a small tear turned into a breached levee.

Blaming computer black boxes for breaks and never understanding their upside contributions, as in the recovery from the lows on Thursday, is an argument delivered by floor trading types like specialist, who found themselves in a position of not being able to react fast enough because the electronic market moved faster than their ability to screw someone. Yes, different models employ various strategies which may at times exacerbate both upside and downside moves, but competing directional and value algorithms contribute trades which benefit price discovery.

Oddly the resulting concerns of price action in these markets will spawn another coordinated intervention among governments and regulators which will inherently buoy and distort the upside values. As we have seen, getting too bearish about macro conditions is a sure way to miss the fact that interventions have been great for the bulls.

Big Investment Banks Need Another 250 Billion: Bloomberg

April 29 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among U.S. investment banks that may be forced to raise an additional $250 billion in capital, cut executive pay and divest some of their most lucrative assets under a bill on the U.S. Senate floor today, analysts say. (By Dawn Kopecki) Entire Story

Goldman's Defense

Goldman definitely designed products which took the other side of the bull market in real estate, but that is the way markets work. If you are a market maker, whether in the pits of Chicago, or in the offices of Goldman Sachs, you are at risk each time you put on a position. In defense of Goldman, they positioned themselves to profit from a potential break in the real estate market, the fact that they sold CDOs to anyone, including their clients, may be greasy, but well within their right to trade a given market. Their unique position to profit from the transaction as well as the trade grinds on all of us a bit, but they were ultimately at the mercy of the direction of the markets. In trading you are always a hero or a goat. Could the real estate market have continued or even accelerated its rally? Unlikely, but none of us knew the timing of the break and certainly Goldman, despite the hype, is not as smart as they would have all of us believe. Collectively it is a company of transactors, not traders, but their opportunity to profit from macro moves in the economy is a part of the financial factory they have built and our economy promotes. The fact that the market was the final arbiter of their actual trading positions is their defense.

Goldman, What A Shock

Goldman, what a shock. I guess if a Republican had been in the White House they would have seen this coming, but one would think Goldman has enough friends even in the current Administration not to have been cold cocked by the SEC announcement on Friday. The smokey intentions of possibly setting up clients to take the downside of a trade is almost inevitable when you are in the financial transaction business as Goldman is and so the great outrage displayed in the media is once again part of the performance art of today's business news industry. Goldman did what Goldman does, hiding in the middle allowing the big dogs eat while collecting fees often times when market conditions are exceptionally dangerous. They have that right. But the long tail of structured products linked from investment firms to rating agencies and finally to wake up stupid clients will certainly reveal a culpability that will be shared by all those who were seeking to stretch financial performance ultimately at the expense of taxpayers.

Greater transparency is clearly an issue which easy to talk about and hard to create. Investment firms do not want it, the Fed and Treasury have told the courts not to reveal their intervention actions, and the banks have recently stated they will take the fight to hide to what extent any of them received bail out funds all the way to the Supreme Court.

This Goldman event will guarantee passage of financial reform but with enough loop holes to allow the creative shadows to hide the next financial disaster.