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Stocks surged yesterday on optimism that consumer confidence will boost the economy. Oil also advanced on a possible coordinated production cut from OPEC and Russia. As all know, oil and stocks plunged Monday on the inverse reasons of yesterday’s advance.
Yesterday a Bloomberg headline read “High Speed Firms Now Oversee Almost All Stocks at NYSE Floor.” In other words and according to Barclays’s HFTs now manage and buying and selling of nearly all securities as there was the admission of another HFT to the trading matrix. The total number of high frequency trading firms…four.
Based upon the Bloomberg article, there is less than 15% of US stock trading is done outside of HFTs.
Anyone with more than 10 years’ experience will fondly recall the days of “specialist firms,” the dozens of firms designed to keep market stability. Yes it was more expensive but there was the human element, a human element that made investment decisions based upon an investment thesis predicated upon geopolitical and macroeconomic thought.
Today it is just a machine utilizing moving average lines and momentum, believing the status quo will remain forever. The big get bigger and the small get smaller and to hell with corporate analysis.
This is not investing.
Earlier in the week Barclay’s commented about the possibility of a “failure to deliver” crisis, the result of unbounded naked short selling. I rhetorically ask what is the possibility of a financial crisis because a segment of the market surges, the result of massive short covering, which bankrupts a HFT and challenges the liquidity of a primary treasury dealer?
Wow! Talk about the ultimate black swan event!! Financial crisis typically occurs when prices plunge not surge. However the outcome is the same—financial stability and integrity is questioned.
Today is the conclusion of the two day FOMC meeting. No change in monetary policy is expected however all will scrutinize the post meeting statement in an attempt to determine if the Fed has altered its potential forecast of four 0.25% increases for 2016.
I again rhetorically ask are we placing to much emphasis upon these forecasts given that the central bank said monetary policy will be dependent upon the data?
What will happen today?
Last night the foreign markets were mixed. London was down 0.34%, Paris down 0.46% and Frankfurt down 0.55%. China was down 0.83%, Japan up 2.72%and Hang Sang up 1.02%.
The Dow should open nominally lower; I think the result of Apple’s warning that sales may not be estimates. As noted several times during 2015, APPL replaced GE as the most over owned and recommended stock in history. (Note: GE held this title in 2000 and is still down over 50% from those levels). Apple is almost down 30% from last year’s high and almost 25% from November’s levels.
I rhetorically ask is today’s massive bifurcation between the averages and the individual equity nearing its end, a bifurcation a primary result of HFTs and ETFs?
The 10-year is off 3/32 to yield 2.01%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.