Aug

27

The most amazing thing about markets to me is that no matter how many previous instances I have, I can never find days that are anywhere near the ones we are currently having. The S&P is moving from x day highs to y day lows with impunity and alacrity and then hanging on the balance scale at the end of day when Zeus decides who will win.

Peter Earle replies:

I remember reading a book several years ago about Roger Bannister and his breaking of the four minute mile in 1954. At the time there were any number of physicians who predicted that the record was physically impossible to break; one predicted that Bannister's heart would explode in accomplishing such a feat.

I was reminded of this in both watching (and hearing) that, once again, in a seemingly inexorable march of highs (and lows), world records were broken throughout the Olympics in Beijing.

It bears mentioning that the events themselves have changed greatly from year to year: not only in the rise of professional Olympians, undistracted from a training (indeed, a living) regimen by employment, formal education or social duties, but as well in the structure of the events themselves. Engineered swimsuits, deeper pools, vacated end lanes, and other such changes in swimming events alone have contributed to the aforementioned increase of extremes.

So too, in the markets: that the year-over-year outdoing of previous records in extremes have as much, if not more, to do with the character, fragmentation and specialization of market venues; the "democratization" of access to various markets, bringing millions of additional opinions and hundreds of billions more dollars in; the rise of electronic, in particular algorithmic trading; better/faster processing speeds in technology; and the like, ad infinitum — than of any intrinsic quality of markets.

Kim Zussman ponders:

Like global warming, it is hard to measure whether the market becomes progressively and durably more efficient, or just temporarily stations in an efficient regime. Presumably the proportion of outperforming trader/investors who persist over long periods must go down if markets get more efficient, but that number ought to be hard to get, in that widespread knowledge could discourage the hopeful machine.

Anatoly Veltman adds:

I'll give you another factoid: TY (10-y Treasury futures) lost 10% of Open Interest on the Fri, Aug 22 drop. We just found out that FV (5-y Treasury futures) gained almost 10% of Open Interest in Tue, Aug 26 slow trade. Any connection to the recent abandonment of 10-y as the benchmark?


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7 Comments so far

  1. Mulholland Drive Street Racer on August 27, 2008 9:47 am

    because of Employee Choice Act and the specter of the Vassal State as I heard Bernie Marcus describe this morning and read in the WSJ yesterday.

  2. diego joachin on August 27, 2008 12:02 pm

    Last week we had positve changes in open interest for coffee (15%), corn (3%), wti oil (10%), wheat (8%) and natGas (-7%).
    Natgas is strong this week.

    when we find an explanation for those changes, prices will be telling another history.

    i think it is a cash shuffle from non-US traders picking bottoms, like nat gas, and maybe the T notes.

  3. George Parkanyi on August 27, 2008 1:04 pm

    I always chuckle when people get excited about this index or that index reaching some milestone. All these indices conveniently and quietly prune their delinquents and ne’er-do-wells and replace them with the latest and greatest new hopes. Indices don’t necessarily reflect the ansgt entailed by those individual securities that drift into long-term obscurity or go off the board completely - except maybe the NASDAQ in 2001 when they were ALL black sheep for a while. No urine samples for the S&P.

    Any game where you can change the rules and/or pad the results whenever you want is always more fun to play.

    Cheers,
    George

  4. Luigi 'spec' Vigilante on August 27, 2008 4:49 pm

    i think Peter Earle has singled out perfectly the main cause of current market behavior. it’s the “democratization” of access to various markets that creates these extremes in which the extremes are the fills of the stops of the would-be-savvy-spec public and the would-be-next-soros hedgie. as per algo-trading, it doesnt improve the final executions, it just adds chaos to the chaos. having said all this, luckily enough for the attentive speculator, the acute observation of market moves will always deliver excellent opportunities; in extreme situations too, actually even more.

  5. Evan McKeown on August 27, 2008 6:03 pm

    This is a market that encourages buying the dips and selling the rips. A day traders dream. Those that employ a prudent strategy of buying with a tight stop will only see the stop executed and their capital erode as the extreme volatility will take out most stops only to run back up to resistance levels in the afternoon. This has been a wonderful market to trade. Eventually, this too will end. The SPY is hovering just above the 50 and 20 day moving averages. Once this reistance is taken out on substantially higher volume than we have been seeing, then we have some running room to the 200 day level. Until then, the pattern is no pattern. Quants will continue to be frustrated as their programs have never experienced a market such as this. The nimble trader will continue to rake in cash scalping from the intra days moves. Bears will be frustrated as they wait for a large drop from a rising wedge that will never materialize.

  6. Manuel Bravochico on August 27, 2008 10:04 pm

    Evan,
    Too bad the same can't be said for US bonds, a tight range this year with little low hanging fruit.

  7. Matt Johnson on September 9, 2008 8:26 pm

    Very interesting, I don’t think these markets are any different than they were last week, year, decade or century.
    Even if I cared to convince myself that they were different, why would it matter? What would you do differently?
    It sounds like you’re taking your backtesting WAY too seriously.

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