I wonder if the fund managers who were so gleeful last week on Bloomberg about the "buying opportunity" are a bit more nervous now? Lots of interesting events this week.
If you were trading the SPs on Wednesday, you probably noticed a marked chance in behavior re the "noise level". 10 ticks up, 10 ticks right back down, 10 ticks up, ten ticks down...., also, affectionately known as "noise". You probably also noticed a huge drop in the size of the bid/ask. All markets have their own footprints and the footprint in the SPs had definately changed mid week. It is pretty hard to keep things "mum" in this industry, so it did not take more then a few hours of networking around to learn that one of the largest firms specializing in algorithmic "black box" auto systems (market making), had taken a rather large hit the prior few days, and had turned off all their auto-trading systems. Another large firm specializing in the same game, claimed "technical difficulties" and had also shut off their auto trading systems. These type of systems add liquidity to the system and generally make up about 40% of the volume in the e minis. Some of the systems work in the manner that a floor specialist would - buying on bid, and selling out on offer 2-3 ticks higher, or shorting on offer, and covering on bid 2-3 ticks lower - constantly extracting dollars out of the spread between the bid ask.
The specilaists in the good old days were the most profitable group in the markets and that role is now played by the algorithmic machines ....a game that is won in part by superior speed and technology. We are talking 5 - 15 billion dollar funds with track records running between 15 - 60% a year over many years.... And now one of the largest of them is actually DOWN on the year. Shock. Every system is vulnerable in some way shape or form - there simply are no givens in the financial markets (other then the fact that the majority sure do seem to lose money). perhaps the Achilles heel for these systems this past month was the elimination of the uptick rule, which may have shifted the nature of the SPs that little fraction that it takes for a finally tuned system to fall out of equilibrium. Perhaps there were fewer upticks then there might have normally been , even during a big market decline.
Never take anything for granted, be it a 'for sure' winning system, market relationships, or historical valuations. Every system has an Achilles' heel. Never take for granted that the game will continue as we know it. I will confess that I actually LIKE it when the black box systems are around. Everyone likes liquidity, even when the market is in a downtrend.
Now, I wonder if those Fund managers who were pointing out what a buying opportunity last week was, are wishing for a bit of liquidity so they can secretly start lightening up......If not, we are going to continue working down to those February lows seen earlier this year. If so, we are still working down towards those February lows. Where will the uncle point come in? I suspect that when this market does eventually stop going down, it is going to land with a thud and have a dead cat bounce.
P.S. Never take intermarket corellations or relationships for granted either......Gold actually had a splendid rally on Friday while the SPs fell out of bed, unlike the previous SP freefall..... Short term technicals only? or, indicative of something else? Who cares......NEVER try to figure out the reasons why markets move as they do!
Stay tuned, same bat channel, same bar line.......Sunday night