by ilene - August 30th, 2015 5:02 pm
Courtesy of Urban Carmel, The Fat Pitch
Summary: Waterfall events like the current one tend to most often reverberate into the weeks ahead. Indices will often jump 10% or more higher and also attempt to retest the lows. Volatility will likely remain elevated for several months. But the fall in equity prices, which has knocked investor sentiment to its knees, opens up an attractive risk/reward opportunity for investors. Further weakness, which is quite possible, is an opportunity to accumulate with an eye toward year-end. However, a quick, uncorrected rally in the next week or two would likely fail.
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Equities ended the week higher: SPY and DJIA rose 1% and NDX rose over 3%. Outside the US, Europe gained 1% and EEM gained 3%. The biggest mover was oil, which gained 12%.
The last two weeks have been remarkable. On August 17, SPY closed less than 1% from its all-time closing high. A week later it had lost 11%. And then three days later it had regained half of those loses, jumping 6%.
A drop that much, that quickly, is very rare. According to David Bianco, it has happened only 9 times in the more than 20,000 trading days in the past 80 years. All of these occurrences were precipitated by (perceived or real) political or economic crises.
That was the case now as well. Since the Chinese Yuan depreciation began through the low in equities on Monday, 92% of the fall in SPY occurred overnight. Cash hours were nearly flat. The fall in equities had very little to do with domestic earnings or economic reports. It was a reaction to events overseas.
Our view has been that the Yuan depreciation (just 3% to date) is unlikely to have a long lasting affect on the US stock market or its fundamentals. Exports to China account for less than 1% of US GDP. Only 2% of revenues for S&P companies is directly derived from China (data from Barrons).
by ilene - August 30th, 2015 12:26 am
This week's major topics: 5% Rule, Short-term and Butterfly Portfolios, Trade Ideas, MSFT, NASDAQ, SPX, S&P, AMZN, WMT, BBY, AAPL, China, and Global Implications
Subscribe to The Phil's Stock World YouTube Channel here.
- 00:00 Disclosure
- 2:40 Butterfly portfolio, review positions, MSFT, WMT trade ideas
- 17:28 Hedges
- 24:50 Short-term portfolio, review positions, hedging
- 35:00 NASDAQ, AAPL, S&P, AMZN, WMT, McDonald's, Uber trade Ideas
- 58:00 MSFT, IBM, HP, trade ideas
- 1:09:20 Hedge SPX trade ideas, review positions
- 1:21:15 BBY, AMZN, AAPL, trade ideas
- 1:33:10 NASDAQ 15% drop, 5% rule
- 1:43:58 China, global implications
- 1:53:26 Richmond Fed, Home sales, S&P Home Price index, FHFA Housing index
by ilene - August 29th, 2015 4:38 pm
Courtesy of Joshua Brown
Responses are pouring in from my post Computers are the new Dumb Money. A few of the quants I know told me the link was hitting their inboxes all day from friends and colleagues around the industry. A few desk traders I talk to had some anecdotes backing my assumptions up. One guy, a “data scientist”, was furiously angry, meaning he probably blew himself up this week or has some other deep-rooted insecurity about what he’s trying to do and needed to vent.
If you haven’t read it yet, go here: Computers are the new Dumb Money (TRB)
One thing worth keeping in mind about algorithmic trading is that there will always be some strategies that are better executed than others and many that will thrive while their competitors are chopped to pieces. In this respect, they’re no different than any other traders or funds.
For example, the quant funds that were probably most injured this week were those who were in the business of selling volatility or gamma. If they’re short gamma, they end up having to dump a ton of stock when volatility breaks out and prices dive. This kind of action is what exacerbates declines and makes a down-2% day into a down-4% day – especially when everyone is doing the same thing (see ‘portfolio insurance, 1987’). If they’re short vol, then they could be running one of those fabled strategies that picks up nickels fairly consistently until the steamroller flattens them – taking in options premiums in small, yet reliable amounts, and then a crisis forces them to actually make good on all that insurance they’ve been writing.
This has happened before, it will happen again. It doesn’t mean that all quant or algorithmic trading is foolish. It just means that the alchemy still isn’t all it’s cracked up to be.
[Picture via Pixabay]
by ilene - August 29th, 2015 2:42 am
Courtesy of Joshua Brown
Ethan Harris, US economist at Bank of America Merrill Lynch, put this out to clients two days ago:
As the markets continue to sell-off, an increasingly popular view among investors is that the Fed won’t hike until next year. Global growth is weak, Chinese policy mistakes have destabilized their markets and the US equity market has finally succumbed to the pressure, with a roughly 10% correction. Thus far only a handful of economics teams at major houses have shifted their Fed call to next year, but both market pricing and most clients we talk to see a significant delay in Fed tightening.
We think some delay is possible, but a big delay is unlikely. It is always dangerous to make big forecast changes during periods of turmoil in markets. It is a bit like going food shopping right before dinner—your gut, instead of your mind, starts driving your decisions. Yes, if the Fed met today, they would very likely take a wait and see attitude and delay hiking. Why create further market volatility? Why not wait to see whether this is an economically important shock? However, there are three weeks before the Fed decides. If the markets stabilize, the Fed outlook will feel a lot different.
In the 48 hours since this note, the US economic data has continued to come in stronger than expected. Yesterday’s 3.7% revised print for 2Q GDP growth was the obvious highlight, along with some new data this morning on consumption and personal income.
Personal spending, measuring how much Americans paid for everything from home rent to dental care, rose 0.3% in July from a month earlier, the Commerce Department said Friday. Consumption climbed 0.3% in June and 0.8% in May.
Personal income, reflecting Americans’ pretax earnings from salaries and investments, climbed 0.4%, replicating the gains of the prior three months. Within that category, workers’ wages and salaries climbed at the fastest pace since last November, as did their disposable income.
by phil - August 28th, 2015 8:31 am
Oops, sorry, I'm not supposed to do this.
Sometimes we know things in advance and we are not allowed to talk about them until the data is release and Personal Income and Spending reports don't come out until 8:30 but we already know Personal Income and Spending are heading lower, not higher as expected, because it's right in yesterday's GDP Report, which shows Real Annualized Per Capita Disposable Income at $37,843, which is down $3 from the last estimate, not up at all.
Overall Gross Domestic Income (GDI), which includes our Corporate Masters, increased just 0.6% in the 2nd quarter, compared to 0.4% in the first half. This does not seem like the kind of number that would lead us to have a MASSIVE upward revision in GDP – from 2.3% to 3.7% in the second estimate and up 3.1% (400%) from Q1's anemic 0.6% growth rate.
by ilene - August 27th, 2015 8:54 pm
Courtesy of Joshua M. Brown, The Reformed Broker
You want the box score on this latest weekly battle in the stock market?
No problem: Humans 1, Machines 0
Because if you think it was human beings executing sales of Starbucks (SBUX) down 22% on Monday’s open, you’re dreaming. And if you believe that it was thinking, sentient people blowing out of Vanguard’s Dividend Appreciation ETF (VIG) at a one-day loss of 26% at 9:30 am, you’ve got another thing coming.
By and large, people did the right thing this week. They recognized that JPMorgan and Facebook and Netflix should not have printed at prices down 15 to 20% within the first few minutes of trading and they reacted with buy orders, not sales. They processed the news about the 1200+ individual issue circuit-breakers and they let the system clear itself.
Rational, experienced people understood that an ETF with holdings that were down an average of 5% should not have a share price down 30%.
Conversely, machines can only do what they’ve been programmed to do. There’s no art, there’s no philosophy and there’s no common sense involved. And volatility-shy trading programs have been programmed to de-risk when prices get wild and wooly, period. Their programmers can’t afford to have an algo blow-up so the algos are set up to pull their own plug, regardless of any qualitative assessment during a special situation that is obvious to the rest of the marketplace.
Warren Buffett once explained that “Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Ordinary investors, in the aggregate, have learned their limitations the hard way over the last few decades. This is why 25% of all invested assets are in passive investment vehicles and Vanguard is now the largest fund family on the planet. Retail players gave up on the fever dream of Mad Money long ago; Mom and Pop are now investing in the missionary position from here on out.