Expect Weakness

I have to tell you I cringe every time someone tells me the market will go down because volume is more heavy every time we sell off versus when we go up. Well of course this is the case. People are more in a hurry to sell then to buy. There is just more of an urgency to get out of positions. Look at it this way, the markets are up 2/3 of the time over the last 100 years or so, so roughly 1/3 of the time the market is down. So why in the world are the markets not higher? Quite simply during the down days people are in a hurry to sell out of positions. There is much more urgency to sell on down days then to buy on up days.

So the simple idea that volume picks up when stocks go down is useless information. The market is acting as designed. What we have to figure out as traders is what is the nature of the selloff? Is there something structurally wrong? Most importantly what is the degree of the selloff? Is the selling overdone? You also have to ask these questions when measuring volatility.

The credit crisis happened not because traders and bankers didn't account for the risk that was prevalent, they knew the risk existed. It partly happened because they didn't understand the nature, degree, and scope of that risk. That is because they thought risk was all but eliminated by complex quantitative modeling. They taught that spreading risk was equal to eliminating it. From this they typically under priced risk. The under priced risk just allowed then to leverage up more complex financial products. This is AIG Financial Products in a nutshell.

From the time I was a little boy I was always told by my parents "Do Your Math Homework!" "Learn Your Algebra!" We are constantly reminded how smart the Math Geeks are and were. This alone permeated the Wall Street Zeitgeist the last 20 Years where PhD Math Genius's were creating these models that they thought were making markets more efficient, but in fact in actuality they were making markets more unstable. Minsky stated that markets are inherently flawed and unstable. Once you add complex financial products modeled by math geeks, what do you get?

http://tradersutra.blogspot.com/2010/01/quants.html

http://tradersutra.blogspot.com/2009/10/kill-quants-but-dont-forget-congress.html

http://tradersutra.blogspot.com/2009/11/problem-with-var-risk-management.html

I don't blame the Quants 100% although they do get a lions share of the blame, its the fact that mediocre bankers/traders/officers were completely seduced by them that is unforgivable.

As I write the Markets are weak. It's pretty much going by the script. When news of the Volcker Rule was making its rounds last week, markets started to selloff. China also had something to do with it, but the Volcker Rule proposal didn't help. I though the markets would bounce and they did. This was because the Volcker Rule proposal was already being gutted like all other regulatory measures. The markets enjoyed a few days of advances. But today its back to reality? Weekly claims data was a bad print. They increased instead of dropping. This is what we call a negative U-Turn in the business.

So what we have so far is:

New home sales weak
Existing home sales weak
Weekly Claims weak

This week's number of 480,000 was 25,000 worse than expected, and 8,000 worse than last week's 472,000. The 4-week average rose to 11,750 to 468,750. Unadjusted claims rose 28,234 to 530,405. Continuing claims increased by 2,000 on a Stand Alone basis, to 4.6MM and by 62,784 Non SA to 5.7MM. EUCs surged once again to 281,442 for a new total of 5,632,219. Extended benefits claims fell 39,129 to 222,833 as ever increasing numbers of people roll off extended benefit eligibility.

The Labor Department stated that this was a clean number.

What concerns me here is that claims data is a forward looking indicator. Where as tomorrow's Non Farm Payroll is a backward looking.

Is this just another predictor of an impending double dip recession?

The markets have support at 1075-1080 level. I was actually surprised that the markets floated all the way above 1100 earlier this week, but we are back to where we were last Friday. We should be weak pretty much the whole day. The banks are weak because they suck. They cant be owned here.

I expect Crude Oil to get weaker. The dollar will get stronger. Treasuries should go higher, if not we have much bigger problems then weekly claims. People ask me about Gold. Gold will be weak as the dollar is stronger, but Gold is the new Hedge Trade similar to Crude in 2007-2008. People will pile into Gold as a natural hedge against economic weakness. Also as the markets tumble, central bankers will do what they do best - PRINT!

I see the SPX moving down to the 1030-1040 area very soon. The long term VWAP for the SPX from the March 2009 lows is right around 950. That is my ultimate print that I see happening in the short term. Remember markets drop much faster then they go up. Mutual funds/Institutions and hedge funds have gains they need to protect. Also of note program trading on the NYSE rose last week when the markets dipped. I expect that figure to rise again this week as well as for the foreseeable future. Everyone knows that HF/Program/Algorithmic trading is anywhere from 60%-70% of all market volume across all venues. This is a recipe for disaster.