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The Headlines are Horrific, but Do the Headlines Really Reflect Reality?

The headlines are horrific but do the headlines really reflect reality?  Bad is good and good is bad, an environment where everyone has a view, a view that is automatically taken authoritatively given the unedited blogosphere.  It can be argued these radically different perspectives are reflected in the equity markets, a reflection amplified by black box trading.

Bloomberg interviewed a MIT quant guru who has designed various black box trading models stating algorithmic trading is largely contributing to the volatility, volatility partially the result of most utilizing similar algorisms amplified by ETF deleveraging.  

Perhaps the best analogy in the article was one when people move to the left side of the boat and then to the right side of a boat in concert, a movement that now takes minutes as opposed to days or weeks.  This movement may have little macro-economic justification but is perhaps the result of a very crowded trade.

My immediate thought of the lengthy interview was no dah.  The volatility of the last 5 weeks has been trying for even the most seasoned market participants where the Talking Head’s concert movie “Stop Making Sense” comes to mind.

Will monies continue to gravitate to the real economy given the emerging consensus that the equity markets are rigged at the expense of most except for the largest financial firms?  Wow!  What an incredibly inflammatory question!!

I believe that markets/companies will ultimately reflect their underlying value, a value not derived by momentum or cross correlated trading strategies.  I think this transition commenced about 5 weeks ago following the narrowest trading range of the S & P 500—a narrow trading range that did not remotely reflect the intense volatility occurring just beneath the surface—in many years.

Unfortunately only history will suggest if this is an accurate outlook but I will write history does state trading strategies do get crowded and the transition is often volatile, occurring when most think it will or cannot happen.

Commenting upon yesterday’s market activity, equities surged about 2.5% following a rally in Chinese shares.  The 10 year was down about 19/32.

Last night the foreign markets were up.  London was up 2.08%, Paris up 2.57% and Frankfurt up 1.77%.  Japan was up 7.71% up 4.10%.nd Hang Sang

The Dow should open moderately higher following a strong rally in Japanese shares, the result of a pledge to cut Japanese tax rates.  Chinese shares also advanced on optimism of further Chinese stimulus.   The 10-year is off 13/32 to yield 2.23%.

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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.