When Markets Go Awry: The Need for Humans

5/12/2010 07:48:00 PM / Posted by Soullfire / comments (0)


Last Thursday's short lived intraday 1000+ point market dive and subsequent recovery, a "Flash Crash",  raises some big questions on the stability and quality of our electronic market system.

The new age of technology and computers was heralded on Wall Street with the computerization of the market exchanges. Conversely, the NYSE was seen as being antiquated with their manually managed open call system where a human market maker determined the prices of the bid and ask of stocks.

Yet, the May 6 debacle showed that we may have gone too far too fast. The 20 minute cliff dive seen is still being investigated as to what caused it. So far it is believed to have been triggered by a CitiBank trader who mistakenly executed a billion dollar sale over the intended million dollar execution. This allegedly triggered a chain reaction among all the automated trading systems who read the market activity as a big sale trigger.

Now CitiBank is denying that they had anything to do with it, and the other problems that occurred certainly can't be blamed on them. For all we know, someone could have hacked into the system like in the movie WarGames and played "Stock Market Crash" instead of Global Thermal Nuclear War.

The market dive was interesting in that it was done on low volume- not a big volume dump that would truly indicate widespread panic selling. Other big problems was stocks were being mispriced at either pennies or over a hundred thousand dollars. Regardless of what triggered it, there was a definite error in the system as the markets went haywire.

There was one market that didn't go haywire - it was the believed "antiquated" NYSE who still has humans setting the market prices for their stocks. They saw the aberrant pricing and decided to slow down the trading action while the they checked the validity of the stock prices. The meant that trades were not being executed instantly, but had a delay of 30 seconds or so. The other electronic markets traded past the NYSE and ran with the given prices. This resulted in the NYSE being the only market that was still open during that time that maintained sanity in their stock pricing. They were also the first to decide to cancel any automated orders that were part of NYSE (ARCA) that happened with the erroneous pricing.

The news may be playing it down, but what happened that day was a SERIOUS malfunction of the US automated trading market, and could have had grave consequences on the worlds economies. During that time, it looked like the market was on its way to completely collapsing, and any one witnessing that would be inspired to sell and keep selling. There were also stop loss orders that would have been triggered taking people out of their positions at the lows of the day. This unfortunately adds more tarnish to the US financial system, which already has a black eye from the dubious actions of the major investment banks which are being blamed as the primary cause of the current Great Recession. If our market stability comes into question, it would gravely impact international money coming into America, not to mention our own security and peace of mind.

Canceling all the trades that occurred with crazy pricing was the right thing to do, as this wasn't triggered by real world events, but an error in the system. If the trades were allowed to stand, that would mean that people would have lost and made money based on a computer error which would seriously undermine the security and safety of our markets. It would be like a bank making an error with their accounts giving some people more money and taking away money from others, and then saying it was going to let those errors stand. That bank wouldn't be in business much longer if they went that route.

It also shows you the limitations of our current computer technology. Without a human mind in the system to evaluate the validity of the trade during volatile times, the market was more than willing to trade at whatever prices it received. With the myriad of worldwide financial news being taken into consideration, there are just too many factors to consider to think a computer can be programmed to take all of these into account and come up with a sound judgment - our technology is no where close to that.

You can be sure that more regulations are on the way to bring more stability to the markets, which is a good thing. An error like the one we experienced will most likely be triggered again on perhaps an even bigger scale unless proper checks are put into place. The current checks are not enough- the first built in market slow down is only triggered at a 10% intraday market drop. We were close to that, but didn't hit that number. Perhaps that number should be reduced to a lower number like 5% or 7%. Our current checks are now only meant to slow down a falling market, so there is nothing stopping the market from being bid up to the moon in one day with no forced time outs- this doesn't sound very safe either.

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Stock Meltdown and Whipsaw: Robots Gone Wild

5/06/2010 05:25:00 PM / Posted by Soullfire / comments (0)

Today was another historic day in the markets - it was the greatest intraday plunge since 1987. This was matched by the mother of all whipsaws when the market dived over 650 points in just 15 minutes bringing the Dow loss to over 1000 points, only to surge back up over 600 points in just 8 minutes. To put it another way, the Dow moved over 1250 points in just about 23 minutes.


As you can see, the market literally falls off a cliff and then rapidly recovers much of the loss. That's an incredible amount of volatility!

Here's what it look like on the S&P 500:


As this was going on CNBC had live video of people rioting in Greece over the govt approved austerity measures as they try to climb out of their debt problem.

Just remember as you see these countries in financial turmoil, that much of the damage was caused by them having toxic CDO assets that went worthless. This is the gift the big investment banks have given to the world....yet you still have folks trying to justify their existence instead of scaling them back.

This super-sized whipsaw most likely caused big casualties in the market today. All those who had stop loss orders placed most likely had them triggered as the market plunged. It's never fun to get stopped out of a position, only to have the market reverse and go higher. The market got me to cough up some shares before the real dive happened - thanks heaven I pulled the plug early!

The next set of victims were day traders- the human ones. The market moved so fast that if you weren't fast enough, you were likely to either get burned on the way down, on the way up, or from both sides. I made a few mistakes and got singed here too. I'm sure a few folks manages to capitalize and make some money if they timed it right.

The third set of victims were the robot day traders. What ever triggered this dive (they are still investigating) took everyone by surprise and the machines just exacerbated the moves as their algorithms went with the flow. I'm sure some auto trading machines fared very poorly.

The only folks who escaped that whip were the ones ignoring the market. Of course, the aren't completely unscathed as the market still ended the day with over 3% losses.


NYSE (ARCA) and NASDAQ have announced that the are canceling ALL trades that happened during the plunge/whipsaw for stocks that were more than 60% off were they were trading before the big moves. Not sure how this will be tallied in...

Apparently the latest track is that some traders fat fingered an execution and instead of executing a million trade sell, he triggered a BILLION execution instead.

No Country for Old Men...or Humans

Now there is talk about more regulations needed to control the level and timing of trading. With hyper fast trading, computers can now process and work on over 1000 bid/offers per second. There's no way humans can compete with that on the short term. Manual trading gets safer the farther out you go in the time line as you have the longer term trends to support you.

Now everyone is getting worried again after months of "happy times are here again" complacency.

To be ahead of the game, all one can really do is stick to technical and trend analysis. Don't base your decisions on the news or emotions, but keep them in mind in the background. The long term trends should be the primary markers to show you whether to be buying or selling.

It's is interesting that turmoil in Greece can send sink our markets as well. It just shows you how connected we are. Don't you find it strange though that when Greece first announced that had problems several weeks ago, the market shrugged it off and moved higher? This is why you can't trade solely on news.

As I've said in a prior post, fundamentals ALWAYS catch up to the market eventually despite the market's willingness to ignore it for an extended time. This market is to be traded - buy and hold is high risk at this time.

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Is the Bear Market Dead?

4/26/2010 07:40:00 PM / Posted by Soullfire / comments (0)


Since the March 2009 market ultra lows, the market has been on a high octane tear moving ever higher. The Dow has recently moved past 11,000 reaching 19 month highs. The Dow has also enjoyed eight straight weeks of gains, giving it the longest winning streak since January 2004. The Nasdaq is also having an eight week winning streak and a third of the S&P 500 companies are at 52 week highs.

All bearish analysts are left in shock and awe as the market surges continually upward.

With all this market euphoria, shall we proclaim that the worst is behind us and that good times are here again?

If you've been reading my blog for any length of time, you'd see that I've been on the bearish side of the market.  I've also talked about a bipolar market that acts as if either everything is good or everything is horrible with no moderate in-betweens.

Okay, so am I guilty of being a "perma-bear", one who remains bearish regardless of what the market does and has an eternally gloomy outlook? I hope not because I can't stand perma-bulls or perma-bears as you can't trust what they say since they're always one-sided.

Anyway, here's my take on the market - we have a complete disconnect between the market technical data and longer term fundamental data. In short, I'm technically bullish on the market but long term fundamentally bearish. Here are my reasons:

Case for the Technical Bull:

One just needs to look at the ever climbing market for that. You can't argue with the market's upward movement. Companies are also seeing improving bottom lines from the lows of 2008/2009.

Case for the Fundamental Bear:


Does it make sense to you that the market has gone straight up in a "V" type recovery as if all the problems have been resolved? Have things improved that much so soon? Here's what we are still dealing with:

1) Decades high unemployment - shedding employees will give big business employers boosts in productivity and better profit margins in the short term, but on the long term will see decreased demand and declining revenue as there are less people with buying income.

2) Crushing debt - In the aftermath of the market melt down, several cities and states are suffering with budget shortfalls. Services are being cut across the board which include fire, medical, and police services. There are municipalities that are in danger of declaring bankruptcy.

Debt problems go beyond the state level. The US Federal Deficit is well over $12 trillion dollars and climbing fast. Spiraling out of control debt will have negative implications down the line with higher taxes along with reduced services and benefits. The US dollar will also be under devaluing pressure which means the likelihood of rampant inflation along with higher interest rates. We've seen $4/gal gas...$5/gal and $6+/gal are real possibilities if inflation takes off.

The US isn't the only country dealing with a huge debt problem. I've written about the financial crisis in Dubai  and predicted that other cities and countries may also be in danger of defaulting on their debt. Since that time, Greece has moved into the spotlight of being in danger of default. This begs the question as to what other cities/countries are on the ropes, but hiding it for now? A default of a major country can have severe economic and currency impacts.

Yet despite all these real problems, the market continues to ignore them and power upwards.

One thing we know for certain is that while the market may ignore fundamentals for quite a while, it will ALWAYS respond to it eventually. The only question is WHEN. Don't expect the main stream media to give you any advance warning....they never do.

Knowing this, the question becomes how does one invest in this market, or if they even should?

I would say yes, one can invest, but one needs to have a short term outlook, meaning being ready to move your funds to safer harbors if the market starts an extended decline. The higher the market climbs in the face of all these headwinds,  the greater the risk that we are moving into yet another bubble.

The main point here is to avoid going into zombie "buy and hold" mode as this could be the worst time for it. It's best to use technical analysis for determining when to buy or sell.