The continued outflow of money from mutual funds and other risk markets has resulted in ES liquidity being dominated by short time-frame players, i.e., large day traders and algos. They're demonstrating that they are not as quick, as in prior months, to flee the market at the first sign of trouble. This has been helping to make intra-day trading more counter-trend within concomitant smaller ranges (notwithstanding the slightly elevated range over the last two days).

We are still not seeing the large, concerted liquidity moves, with attendant price volatility and velocity, we had gotten used to in past months. Of course, it is way too early in the new year to panic, but the market may once again be morphing; this time to lower volume and thinner market conditions.

Not unlike, the effect the Volker Rule had on liquidity, the Fed’s recent announcement that it would substantially adopt the Basel III recommendations for bank regulations, may have caused many banks to re-think the scale and scope of their U.S.-based operations and, in some cases, to pull back from business and market-making. Ironically, monetary policymakers in virtually every corner of the globe are furiously pumping liquidity into the world’s economies increasing monetary liquidity, while the the markets appear to be losing transactional liquidity. Let's hope this phenomena is cyclical or secular at worst, and not structural.

That being said, the market appears to have returned to it’s old ways, in which the old adage is “don’t sell a dull market.” For now, breadth is good and the bullish trend is intact. February tends to be a trend continuation month and there has been some very positive relative strength coming out of the financial, materials, and industrial sectors, and European credit spreads have (hopefully) begun to narrow, along with already narrowing U.S credit spreads. Strength in the Treasuries continues to temper my bullish inclinations, however.

Frothy sentiment, intra-week seasonality and a 3 day weekend contributed to an early Friday 13th sell-off, only to see the bulls step up to the plate at the 1275.00-1270.00 high volume node/POC. If the market continues to hold these levels, weather opex next week,and close above the trendline formed by the May 2011 and July 2011 interim highs, the bulls should reassert in Feb.

Of note: Overnight trading has been responsible for much of the gains, which is common in a cyclical bull- what's uncommon is that this rally has not been supported by either the opening or closing hour–most unlike a cyclical bull.


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