Yesterday’s sudden collapse in the shares of ‘no brainer’ Facebook shares, and the tech wreck it contagiously created, were a reminder for many that the perception of the markets’ invincibility was pure delusion. Asset-gatherers and commission-takers alike implored their clients to ‘buy the dip’ in this ‘healthy correction’, but as former fund manager Richard Breslow notes, the new normal’s return of volatility is “emotionally” hard for traders to handle; but the big risk, that everyone is ignoring, is illiquidity… and its building.
For example, the S&P 500 has now seen 16 days of plus or minus 1% moves in either direction since the start of February, which compares to only 10 occasions through the 13 months ending in January.
I was sitting here feeling old yesterday. And then I realized something that hinted I was younger than I thought. Today it’s back to reality and I’m going to convince myself that the truth lies somewhere in the middle. Which I guess means that, despite all of the news out there in the world, I’m at heart an optimist. Or very good at self-deception. And how did all these swirling emotions come to the fore? It’s all thanks to the stock market which put in what still passes as a rocky day.
Yesterday’s selloff in equities meant little for where prices were and are. We remain locked in a range with enough multiple tops and bottoms to make the case for whatever is your overall view. But there are still lessons to be drawn.
You see, there can be some kernel of good in everything. Back to the optimist or maybe just trying to figure out how to make some money out of this.
It took an overwhelming amount of negative news to finally get markets to realize that the real world does, quite properly, if only occasionally, encroach upon the sanctity of the halls of trickle-down economics. That is actually a good and healthy thing, even if we also need to be having an argument about what, if anything, should be the individual consequences. Cards on the table: not all regulation is bad.
The list of the multiple upsets that gave traders the jitters was long and varied by source, but inevitably also included fears of an overly hawkish Fed tomorrow. It felt, though, like that as a potential cause was in there because it was expected not because anyone believed it. And why should they? That’s thrown in as a residual vestige of a demand for the central bank to do something. The hawkishness some claim to fear should be that the Committee members ignore all this completely. As they should. Funding issues are within the purview of the Fed, not data breeches and faulty software designs for car-robots. Listen for any of this when the Fed speakers reappear. Despair, if any of them mention recent market turbulence or the like.
I was struck yesterday by how little other assets moved while equities where supposedly collapsing. Also a good sign. So far today, however, skittishness, in FX in particular, seems to have picked-up in response to any headlines that could move equities. For the pure day trader, you are all stock chasers today, whatever your actual asset of choice.
Traders and regulators can’t emotionally handle volatility. It’s not that it’s really all that elevated. What no one knows is how much lasting damage has been done to the transactional infrastructure. Think about what discontinuous pricing feels like in major assets before you begin dipping your toe into frontier assets. It’s a very different game.
Nothing is scarier for any trader than not knowing where or when the next bid or offer is coming. If you see dealing at every price then it doesn’t matter if things move a lot. If you start to identify intraday gaps, assume anxiety levels will rise and defensive behavior will dominate. You won’t get dip buying in a market where people are afraid of leaving orders. On the other hand, orderly dealing encourages trading.
Why was I feeling old? I was reading the causes list and couldn’t help remembering Tom Lehrer’s National Brotherhood Week. A tradition we might consider bringing back. As a bonus aside, did you know that Frank Sinatra won a special Oscar for a short he did on the subject?
And how come young? Because along with the rest of the millennials, I was never one of you oldsters freaking out just because February wasn’t simply fair winds and following seas