Everyone tends to see what they are looking for. So those who want a recovery, see signs of growth in the US and see China as still powering ahead. They see the markets having had a salutory ‘correction’, which presages a return to the business of recovery.
I see things differently. Now what I look at are objective data – it’s a matter of whether they add up to what I think they add up to. Or if they are a scatter of meaningless data that collectively miss the point. You decide.
Here is the first piece.
First, I see greater volatility ahead for the stock markets – Particularly the DOW. The reason is simple. There is no trading volume and becasue there isn’t any volume, there is no depth to the liquidity. Low volume means a few players, who trade with machines back and forth between each other, can move the market a lot, for little cash down. And this is how the market looks. The market moves over the last few months have happened near the end of the day, have tended to be very rapid and on slim volume.
On the up side, if your a big bank that is, it means you can intervene to make a down-day turn good and keep the headline writers chattering about up-days and signs of recovery.
On the negative side, however, this low volume makes the market vulnerable to the flash crash we saw last month. The crash happened because there was suddenly no liquidity in the market. Now in a market with lots of players making lots of trades there is a depth to the market and its liquidity. But a few players doing a lot of trades, can make it seem that there is liquidity, when in reality it is very shallow. If just one of them pulls out, and of course being machines that watch each other, what one does, they all do together in a heart beat, then the market volume and liquidity evaporate instantly.
The recent crash was clearly the result of the machines pulling out. When they did, there was no liquidity, no market in fact, and without bids the prices found themselves in mid air without support. Result? Gravity takes over. As long as the markets are the result of machines ramping the prices this WILL happen again each time the machines stop.
Will this happen again? Almost certainly. Those driving the machines will NOT curb them. They will tinker with the code but the essential function of the High Frequency Trades will remain. To ramp otherwise moribund prices for the big banks and make them seem to have more assets and capital than they have. Thus they will remain, at critical times, the market makers and breakers.
The machine trading is an extension of the suspension of Mark to Market accounting rules. Machine trading takes this one step further. Mark to model accounting suspended reality. Machine trading allows the unreality to be inflated.
This ia not a stable situation. It is unstable and will happen again. Look at the markets, they are getting more volatile not less.
And one piece of news that suggests the volatility will increase again is that in May there was a large net outflow of money from stocks funds.