So what was last week? Was it the proof that we were just having a little re-trace before powering on with the recovery? Or was it a week of manufactured confidence, created and sustained for the entire week by HFT trades designed to squeeze short sellers and corall sentiment back to the party line?
Well while markets were being driven up by trading on a very narrow range of company stocks, there was a net outflow of $33.5 Billion from stocks into Money Market Funds. Money Market Funds are considered as close to cash as possible while still getting some return. Flow in to these funds is genrally seen as what happens when investors are afraid of a down-turn in stocks.
This size out-flow in a week compares to Jan ’09 when $37.7 Billion flowed out of the market into Money Market funds.
Of course the irony of it, is that the more money flows out, the easier it is for the HFT traders to ramp prices up between them. As the pond shrinks those who remain, the HFT players become an ever more dominant force.
Of course the question is, why would so much cash flow out, when the market was rising so dramatically for the fisrt time in weeks? Well this coming week is a big one for profit reports from some of the big companies. Alcoa is an early one. Profit reports from real companies is a different thing from manipulating stock prices. I think lots of traders and funds are wondering if reality will reassert itself, or if somehow the Market manipulators will manage to ignore any bad results.
The marklet is not sure what to expect. The massive and prolonged decline in the Baltic Dry Index (of tonnage shipped and cost of shipping) certainly suggests businesses based on real stuff being shipped and traded should have done poorly. But we have seen how ‘poor’ can be ignored because someone says, “it was already priced in”, or “Poor though they are, we were expecting worse so it’s actually good news”.
If that is what happens we will see a tentative continuation up. But it could just as easily fall quite dramatically, because I don’t think anyone really believes last week was based on anything real. Continuation up will be without conviction, based on people not wanting to be the one to tell the emperor he has no clothes on. But up will be forced and I think without real or widespread conviction. And unless conviction about the reality of this recovery, takes hold and spreads, then it is just a matter of time before the enforced ‘optimism’ leaches away.
To me the rally seems much like North Korean rallies. Very impressive but you know no one there believes it. They’re just too afraid to say no. But like all movements based on a lie, there comes a point and suddenly, fear collpases and anger takes over.
For the market to go down the only question is, can the levitation trick be continued? No one wants to be on the wrong side of people who can seem to ignore reality at will. But increasingly no one wants to be the last one supporting a lie when it all suddenly collapses.
Conspiring to the downward side while the ECB says it is going to be reducing its buying of bonds from European banks that can’t get funding anywhere alse. But at the same time as the ECB would like us to believe the day has been saved and normal service is boing resumed, there are persistent rumours that Portugal’s largest private bank is completely out of operating cash. The head of the bank felt he had to actually deby it.
Should be an intersting week.