Money has been flowing OUT of US Equity Funds (funds which concentrate of stocks and shares) for three years now. $234 billion in ’08, a further 9 billion in ’09. This year we are now in our 18th straight week of continuous investor withdrawals. Totalling so far over $52 billion.
And yet, an article over at Zerohedge based on a longer report from ICI, observes that while money and investors have been leaving the building in droves, “…stocks have experienced the biggest short-term equity return upswing in history.”
Money and investors are pulling out week after week and yet the market is going up and up? And doing so, therefore, with less and less money and fewer and fewer stocks being traded. Volume of trading is and has been for weeks at record lows. The last few days have been the lowest.
Why have the markets been going up while no one has been there trading? It’s a puzzle to say the least.
There has been virtually no positive economic news. At most there is news about which people say “…it’s not as bad as I was expecting.” Housing is drowning in its own ordure. Unemployment continues to spiral down and round and down again, like a helicopter without a tail rotor. And consumer spending is about as cheerful as a wake before the bar opens.
All of which explains why the retail, small investor has simply taken his money and left the building. And which is also why so many investors as well as commentators are very dubious about the market rally. What, they ask, is the rally based on and what is it really telling us?
Part of the answer, of course, is the now unbridled influence of HFT trading. Where a small number of automated trading systems in the biggest trading houses trade back and forth running a few shares, very often bank shares, up vertically, often, though not exclusively, right at the end of the day. Actually I have noticed in the last week that such ramp jobs are occurring in all the markets now and do so earlier in the day, often on tiny bits of news which would normally only move the markets a few points.
But there is also something else. As Nic Lenoir of ICAP noted in passing, “…Order visibility is definitely making it difficult to move size easily,…” This caught my eye. It is the low volume that allows the HFT boxes to have such a disproportionate effect. No one else is trading so whatever the HFT boxes do, is dictating the market. Further, any trader who is foolish to get in trying to trade ‘by hand’ will get slaughtered by the same machines. They can see his bid and move the prices faster than he can react. Usually resulting is his loss.
BUT, and this is what interests me, that same low volume means the owners of the HFT boxes are also trapped. Those big players own lots of stocks. The ones they are trading back and forth and whose volume they are ramping up and up. BUT the one thing they cannot do in a low volume market is get rid of their stock. They cannot start to sell lots of it. Because if they do those would be the only sizable trades and everyone would see them.
The big traders are locked in to what they own already. Even if they think the stock is over valued and going to crash, they can’t sell. If they do, the market sees, reads the trade for what it is and the result is the value of that stock would crash while they are still trying to sell it.
The game they have been playing, of ramping up the prices, is the one they ‘must’ play. It’s the only one open to them. They must convince a lot of suckers to come in to the market on the grounds that the recovery is well underway and prices are on the way up. And THEN they can get out.
Only people seem not to be falling for it. And the longer the charade goes on, the thinner the fiction becomes.
The window of opportunity for the big players, and danger for the rest of us, is if there is another big stimulus package. If there is, and it serves to boost confidence, and people do dip a toe back in the markets, THAT is when the big players will sell to the small ones, get out and watch the bottom fall out over the subsequent 3-4 months as people realise what they have fallen for.