Bored Stock Traders Turn To Crude Before Fomc
While the stock and bond markets did a whole lot of not much Wednesday morning, traders found a better playground in the energy markets.
By Vikram Rangala
Wednesday, May 20, 2015 - 00:00
With crude oil spiking and dropping through a $2.50/barrel range in under 15 minutes, there were plenty of slides and swings to ride.
Waiting for the FOMC minutes is almost always a two-step process of traders collectively holding their breath and then reading the highlights on the news wires, concluding that there are few surprises, and executing the trades they had already planned. It is, to borrow (badly) from Shakespeare, “a tale full of sound and fury,” especially in the days of the roaring trading pits. I’ll leave off the “told by an idiot” part of the quote, but unlike in Macbeth, this tale signifies a bit more than nothing.
Money will change hands, some of it from those placing foolish bets that one bit of language in the minutes will somehow spark a market reaction that can be predicted. Other money will leave the accounts of those caught off guard by algorithmic trading programs that will, as they are designed to, run all the buy stops and sell stops they can, exaggerating any rally or dip that may ensue.
The one sure thing is that money will stay in the accounts of those who don’t trade immediately before and after 2pm Eastern Time, when the minutes are released. If you absolutely can’t resist trading the stock markets’ reaction, a good way to limit risk and still get a good risk/reward ratio is using Nadex binary options and spreads.
One unique feature of binary options is the ability to profit in sideways markets. If the market simply yawns at 2PM and wanders sideways near yesterday’s record highs, you can still get a full payout. But for traders in stock ETFs or index futures, it has been a low-volume, dull slog upwards.
That volume will likely drop further as some traders curtail their trading for the summer. The best-performing half of the year for stocks, November through April, is over and many are following the old adage, “Sell in May and walk away.” After all, selling at all-time highs after the ups and downs of Spring 2015 is not a bad way to end the fiscal year.
Also, children and college students are starting their summer vacation and a surprising number of traders actually enjoy spending time with their kids. Quite often the feeling is mutual.
Algorithmic trading programs, however, do not love their children. They do have them; algos get upgraded as soon as a counter-program is developed to outwit the old one. What algo traders love is volatility and volume. They need to feed.
And the good eating is in energy right now. With the volume down to well under a million contracts a day in the E-mini S&P futures, the world’s most heavily traded stock index futures, a number of traders, their fund allocations, and their algos have turned their sights on crude oil futures instead. One of my sources, an original “Market Wizard” in the classic book of that name and both an S&P and crude oil trader, points out that even as the S&P rallied overall yesterday, more stocks dropped in share price than gained. Most traders will tell you the most common cause of that is low volume. Even a little bit of strong buying can move the entire index.
At the same time stocks were slowly and anemically rallying, crude fell 3.7% Tuesday and showed similar volatility Wednesday morning. Why? No doubt many analysts will have credible explanations. But one you won’t hear is that traders are simply bored of watching stock charts that are about as exciting to watch as a coffee mug spinning in the microwave. Even losing a little money trading crude seems more attractive than that—especially if it’s other people’s money.
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