Tuesday, January 18, 2011

Are the Days of "Investing" Gone Forever?

I can't help but ask myself this question.  The market now slowly rises on a daily basis as the "bearded one" continues to print Monopoly money and give it to the banks who then turn around and pump it into stocks.

Now that we know how the "QE" game is played, I can't help but wonder why stocks aren't rising at a faster rate.   During the tech and housing booms the stock market would rise hundreds of points on any given day.

We have seen nothing of the sort during our current boom.  It's becoming increasingly obvious that the average investor wants no part of this market when you look at the pathetic trading volumes.  If they did, we would be soaring to new highs because the Fed is literally pumping billions into the markets via the TBTF banks.

The rallies of the past never had the opportunity to enjoy a tailwind like this! As a result, one must hesitate and ask why so many people don't want to join the party.

In fact, you must dig deeper and ask yourself:  Why is no one other than the HFT's participating in this glorious rally?

It's becoming pretty clear that no one outside of Wall St is interested in touching stocks.  The HFT's are loving this of course because it makes the market easier to game.  Just look at the price action on a daily basis. The tape just wonders around aimlessly as it reacts to various algo trades.

Rallies are almost immediately sold into and sell offs are almost immediately bought.  I have to admit, it's boring as hell to watch.  There is no conviction at all right now when I look at the markets.

Have Investors Lost Interest?

I can't help but wonder if the average investor just doesn't understand stocks anymore and refuses to buy them as a result.

Can you blame them?  It seems like nobody makes money these days unless they own a sophisticated trading robot.

The trend for stocks might be higher but individual stocks are increasingly trading with higher volatility.  It seems like we see a mini flash crash in a any given stock at least once a month these days.

The Bottom Line

Wall St better be careful because I think they risk losing the average investor as they play their "computer war games".

Americans are scared, frustrated, and confused when it comes to how they should be handling their investments.  Nothing looks safe to them and so many sit paralyzed in cash as a result.  A few brave souls are out there chasing yield but that game seems like it's nearing as end as they watch various munis begin to blow up.

The only people that have confidence in how stocks are trading these days are the computer nerds from Harvard and Yale that created all of this computer BS.

When QE ends(or should I say "if"), the markets are in for one hell of a ride.  Without the "magic" of QE the trading robots may decide that selling and taking profits is their best option. 

If this is what happens when the end of QE occurs then you must ask yourself this question:  Who is going to be left to buy the stocks? 

Answer:  "crickets chirping".

If you are in equities please be careful.  You are one of a brave "few" who have decided to swim with the HFT sharks in the shark tank that we like to call the stock market.

8 comments:

Anonymous said...

Interesting take, but I would (politely) point out that your argument sounds very much like a jockey who is complaining that automobiles have taken over racing. First, full disclosure, I am an HFT trader. I have been involved in electronic trading for ~15 years, so I've seen the evolution of the markets from an insider's perspective.

If I may, I would like to (again, politely) describe the function that both myself and industry practitioners feel the market should serve: It is a pricing mechanism. Its purpose is to _instantly_ incorporate any relevant information into the price of a stock. This, sir, is the reason that you see prices wandering about during the day. Any given stock, say AAPL, has not only its own news but also the news of its competitors (MSFT, GOOG, etc) as well as the indices/ETFs to incorporate. Oh, and foreign markets. Oh, and currencies. And many other things. I know that you are aware of this -- I am not patronizing you -- you sound like a savvy investor.

The fact of the matter is, the markets have gotten MORE efficient over the years. Yes, it is a hectic battle each and every day, with stock swinging wildly. But this is how it is supposed to be in a utopian sense.

I believe, sir, that your frustration stems from the fact that you have educated yourself about investing and feel that those skills are somehow outdated / outmoded by the HFT pirates. Let me tell you something -- many of the HFT firms out there don't know _half_ of what you probably do. They are simply parasitic trading firms that depend on speed (and only speed) as their edge. Trust me, they will quickly fall by the wayside, all but a scant few. It is people like yourself (with actual knowledge of valuation, etc) who should apply their skillset and invest on a multi-timeframe level. As a successful HFT trader (who does not depend purely on speed!) I would be happy to chat with you and show you how your skills could be applied differently and (yes...) incorporate some technology to get you there. No I'm not trying to sell you anything ;-)

Anyway, I can tell from the tone of your post that you love the markets and truly want to participate. Don't lose that love of the markets, brother! Your skills are more valuable than ever, you just might need to adjust your approach a bit.

I hope I encouraged you (and didn't offend you). Be well.

Anonymous said...

"I can't help but wonder why stocks aren't rising at a faster rate. "

Since the bottom, two years ago the market has climbed 40% year over year. That's comparable to rate of growth in the late 90s. Even between '03 and '06 that gap took 3 years.

You honestly expect stocks to rise faster than that? Walk around and listen to the office staff, you'll here novices in the halls talking about the market in hushed tones.

Jeff said...

"Since the bottom, two years ago the market has climbed 40% year over year. That's comparable to rate of growth in the late 90s. Even between '03 and '06 that gap took 3 years."

True anon

But they didn't have the Fed throwing billions into the market via QE like we do today.

Imagine what those moves would have looked like back then with those tailwinds combined with zero interest rates.

I am just making a point that this rally is more fluff than real.

Anonymous said...

Jeff,

I think I could also argue that both those previous run ups were also just fluff.

The internet boom was just a bunch of market speculation on imaginary ideals of the internet. It was essentially just the result of ignorant capital investment and run-ups in overblown expectations relating to internet start-ups.

Similarly, the last run-up was nothing more than a function of low interest rates coupled with lax lending practices.The creation of debt, by definition creates and pushes money into the financial and other markets. Therefore, while the fed was not explicitly creating cash, it was implicitly generating artificial money through low interest rates.

This cycle is only different in the direct hand the fed has in influencing monetary inflation, as opposed the implicit hand it took through reduced interest rates.

Anonymous said...

As a followup, and side-note

One of the interesting things about the current market, is the duality of views regarding the recovery. I hear it mostly on the radio...

Ask if the housing and other markets were over-inflated, and you get a resounding affirmation.

Ask if the markets need to recover to former highs, and you get a resounding affirmation.

Add the two and it sounds like what we are chasing the dream of returning to an unstable economic position.

This world policy is flat out insane. We need to temper expectations, allow things to level out, and stop chasing instability.

Jeff said...

Anon

Well said my friend. Well said.

The market is acting like it's bipolar. SPX is down 14 while the DOW is only down 23.

Bizarre price action.

getyourselfconnected said...

All you can do is play shorter term trades or just not watch. It's hard to find value out there.

NZ (formerly anon) said...

- getyourselfconnected

Short term trading is one approach. I suppose, but it gives me ulcers.

If you want to balance out your portfolio though, with less mania, you can look into core position trading. It is a relatively conservative approach that leverages volatility in exchange for lesser profits in large run-ups.