OT: Market Under Pressure

Well, the “official” uptrend did not last long. Growthy stocks took a hit now that it looks like TrumpCare will not get a vote, which might undermine tax cut probabilities.

5 distribution days on Naz and 3 on S&P.

The Nasdaq cratered 1.6%, closing just above the 50-day moving average, weighed by weakness in chip and biotech stocks. Several recent erratic price swings in the index starting with the June 9 tumble isn’t what the bulls want to see.

The S&P 500 lost 0.8% and the Dow Jones industrial average gave up 0.5%. The Russell 2000 small-cap index fell 0.9%. Volume on the Nasdaq and S&P 500 came in higher than Monday’s levels.

Among the FANG stocks, Facebook (FB) and Amazon.com (AMZN) closed Tuesday just above their 50-day moving averages, but it was a different story for Netflix (NFLX) and Alphabet as both names closed below their 50-day lines.

The risk level in the market has been elevated for a while, even when the market was in a confirmed uptrend. It’s even more elevated now as institutional-quality growth names come under fire.

and another article:

A brief sojourn below the 50-day line is not always fatal. But the sheer number of highly rated stocks — from Applied Optoelectronics (AAOI) to Coherent (COHR) to Lam Research (LRCX) — that have cut through that level is worrisome.

More than half of the IBD 50 fell 2% or more on Tuesday. True market leaders tend to fall about twice as much as the major averages in a correction.

Think about your plan, what do you want to buy on the dips? How much pain can you stand - Saul feels no pain strong enough to be less than 100% invested - do you?

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Growthy stocks took a hit now that it looks like TrumpCare will not get a vote, which might undermine tax cut probabilities.

Hi Puddinhead,
In that case it’s hard to understand the reasoning behind the fall, considering that most of my tech stocks that fell yesterday didn’t have any GAAP earnings at all yet, and thus aren’t paying any taxes at all. And others had such small GAAP earnings that it wouldn’t really matter. What good would a tax cut do them? (Short term, anyway. Hardly the stuff for an immediate sell-off, is it?)
Saul

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IMHO, the analysts who write these erudite articles get paid for providing expert analysis for (or sometimes just about) radical market swings. People seek answers and these writers get paid for assuaging this desire.

I occasionally still read these articles, but I pretty much ignore them. Here’s why: they Invariably ignore the effects of the cascade impact of algorithmic trading.

While I can’t offer incontrovertible proof, it is my reasoned opinion that this type of automated trading has come to dominate the market.

What really changed with the defeat/delay of Trumpcare? Not much so far as I can tell. While investors might react to them, business has a way of shrugging off most political events.

I was in management at a Fortune 50 company. I’ve known literally dozens of people who owned businesses, despite the mantra of one political party that tax cuts creates jobs, I’ve never seen a company hire workers due to a tax cut. Nor have I ever seen them lay off workers due to a tax increase. Employment is almost entirely driven by demand. Daily stock prices are driven by a host of factors, but mid to long term they are most influenced by the success of the company and the PR generated by that success.

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I occasionally still read these articles, but I pretty much ignore them. Here’s why: they Invariably ignore the effects of the cascade impact of algorithmic trading.

You didn’t say how you think algo trading effects things or from your perspective what you do about it.

I’ve thought about this a bit. If I was a short term trader, I think I would get out of the business due to algo trading. I couldn’t be quicker than machines. But as a long term investor, I couldn’t care less how quickly those algos trade and on what type of news. Of course, I may evaluate that news later and decide to do the same things as the algos did. However, most of the time, I sit still. Because of this, I’m not threatened by algos.

Additionally, if an algo buys a stock and I buy a stock and it goes up, we both make money. I don’t necessarily have to beat the algo to it.

Take care,
A.J.

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In that case it’s hard to understand the reasoning behind the fall, considering that most of my tech stocks that fell yesterday didn’t have any GAAP earnings at all yet, and thus aren’t paying any taxes at all. And others had such small GAAP earnings that it wouldn’t really matter. What good would a tax cut do them? (Short term, anyway. Hardly the stuff for an immediate sell-off, is it?)

I didn’t say the sellers were rational!

But, no one can deny how much the market soared when Trump was elected. That was partly because Hillary wasn’t elected and could not continue high regulation, increasing taxes, and growth of government (not starting a political thing here!). Trump was seen as cutting regulations, cutting taxes, and ending the burden of Obamacare. The market went up fast with no real change in earnigs. The tech stocks you own probably got a nice pop. Maybe if companies that actually pay taxes get to pay less, they have more to spend (or even buy other companies with), so that could drive excitement in the market. I speculate that dampening that optimism causes some “risk off”. High fliers may pay the price more because people know they can drop faster. Just get out they say. That is where you make your money, countering people’s irrational moves when you see value increasing for free.

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Pholio,
You didn’t say how you think algo trading effects things or from your perspective what you do about it.

Sorry, I guess I wasn’t as clear as I thought I was. I think algo trading is responsible for the enormous volatility we see in the market. That is what I meant by “cascade.” Trading actions beget trading actions. They are always more pronounced in downswings rather than upswings because that’s how they are programmed. There is greater fear of loss of capital than loss of opportunity. This has been born out by a host of studies and so the algorithms are programmed to reflect the human fear factors.

What I do about it is usually nothing. Why don’t I take advantage of the buying opportunity? I am 100% invested. I am heavily in technology growth stocks which tend to move in tandem. So generally I need to sell something at a loss in order to buy something else that’s just gone on sale. I might take some action if I think I’m overweight in one stock and underweight in another, but I regularly look at my actual percentages compared to my desired percentages and tend to rebalance around month end when I perform this exercise, so the random swings of the market rarely provide me with any special opportunities.

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Sorry, I guess I wasn’t as clear as I thought I was. I think algo trading is responsible for the enormous volatility we see in the market.

If volatility is so high why is the VIX so low?

http://invest.kleinnet.com/bmw1/stats25/^VIX.html

Denny Schlesinger

If volatility is so high why is the VIX so low?

Because only certain companies and mainly the tech sector has recent increased volatility.

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Because only certain companies and mainly the tech sector has recent increased volatility.

Does that mean that algos only trade the tech sector (assuming that volatility is driven by the algos)?

My point is that I find algo trading and high frequency trading irrelevant to my portfolio even if they provide great plots for books and movies. The secret of markets is that they are always trying out new plays to see what works and what doesn’t. Stuart Kauffman calls them “adaptive fitness landscapes.” As people improve their trading skills they change the character of the landscape making trading more difficult for the other traders. This is an ongoing perpetual process and algos are just one more twist in the history of markets. My guess is that the Black-Scholes option pricing model and the Internet had greater repercussions than algos and high frequency trading.

Denny Schlesinger

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Now 7 distribution days on NAZ and 5 on S&P. That is pretty much near the max. One decent down day on volume and I suspect they will declare it a correction.

When it comes to overall market health, it’s certainly not hard to find yellow flags. An elevated distribution-day count for the Nasdaq, suspect breadth, and selling in some high-quality growth stocks are reasons enough to be defensive.

Of the Nasdaq’s seven distribution days, three showed percentage declines of 1.4% or more; in other words, they were fairly obvious signs of institutional selling.

For the S&P 500, however, signs of institutional selling are less obvious. Out of the S&P 500’s five distribution days, four showed percentage declines ranging from 0.7% to 0.9%. The other was tame with a loss of just 0.3%.

The bottom line is that unequivocal breakdowns in market leaders have been few and far between. That’s reason enough for the bulls to look at the market with a glass-half-full perspective, while still acknowledging elevated risk. It doesn’t make sense to have aggressive exposure to stocks at this point, but some exposure is still warranted as the major stock indexes continue to hold near highs

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When it comes to overall market health, it’s certainly not hard to find yellow flags

So, definitely time to sell then.

The bottom line is that unequivocal breakdowns in market leaders have been few and far between.

Or maybe buy it is.

It doesn’t make sense to have aggressive exposure to stocks at this point, but some exposure is still warranted as the major stock indexes continue to hold near highs

Nope. Sell most of it and buy some of it.

Makes sense now.

A.J.
Just joking around as things seem pretty slow 'round here…