Where Have All The Traders Gone?
After the unexpectedly positive Nonfarm Payroll number came out, the S&P 500 went from around 2100 to around 2075, which The Wall Street Journal called a "drop" andBloomberg called a "tumble." (An hour later Bloomberg switched to "drop" as well. Maybe someone there read the Journal and decided to relax.)
By Vikram Rangala
Friday, March 6, 2015
The verbs in the headlines usually reflect not just the number, but also the level of excitement or panic the publication wants to recommend that it's readers feel. 25 points in three hours is not that big, given that this year has routinely seen 30 and 40-point days.
That's why we didn't read that stocks "plunged" or "plummeted." And it's why the picture on Bloomberg.com shows a stock trader who is not clutching his chest or on the verge of a breakdown.
For technical traders, the "tumble" is actually good news. A trend line connecting the lows of October 15 and February 2 places support for the S&P futures at around 2045, which means traders looking to go long will wait to buy at more attractive prices.
A lot of those traders aren't doing much today. Some of them may be shorting the futures or getting out of some equity positions. Others maybe starting to buy, but they're probably holding onto some cash rather than going all in just because we had one 25-point down day.
And that's the real story in the US stock market. It's not the drop in price, but the drop in tradingvolume, which has gone on for so many months now that it is starting to look permanent.
FOLLOW THE MONEY...BUT WHERE?
Recently, most of my trader sources have been saying US stocks were "too high to buy and too firm to sell."
The trading volumes suggest this is true. The highest volumes in stock futures came in 2009, when the worst day saw 6.69 million contracts traded as people dumped stocks in a panic. Even a few years ago, you'd see two or three million contracts traded in a day in the S&P futures. Lately, one million will be traded on a good day, and half of that is in the Globex electronic exchange, outside of active trading hours.
The drop in volume doesn't have a straightforward explanation. Some analysts point to the emergence of dark pools. It may be that some traders have moved to off-exchange trading, but it's hard to imagine that major banks are moving large parts of their prop desk volume there.
With the growing dominance of algorithmic trading, one might expect that the algos would be coming in bigger and executing a lot more trades, but that isn't happening, either. The major effect of algorithmic trading on volume seems to be scaring people away.
The financial crisis certainly scared away a lot of so-called "retail" traders and investors, individuals with brokerage accounts. And while the 200% rise in US stocks and similar bull runs elsewhere have made some people rich, it never managed to pull all the old traders back.
"BE GREEDY WHEN OTHERS ARE FEARFUL"
That piece of advice has been attributed variously to Warren Buffett, Sir John Templeton, and even the 1920s legendary trader Jesse Livermore. Whoever said it, it's good advice today as a smaller number of traders and institutions are profitably taking stocks and the US dollar to new highs and the euro to new lows (just in time for the stimulus to help boost Eurozone exports). There are great opportunities in the markets right now and they shouldn't just go to a few.
With the US economy looking so promising, creating jobs and putting more spending money in people's hands, some of that money may go into investing and trading. But the dangers of another near-depression seem lower this time. All 31 major US banks passed the first phase of a new Fed stress test, designed to ensure that banks weren't overleveraged and unable to handle losses. That's a huge development for building trust in the US financial system.
Nadex, incidentally, was founded in 2009 and represents a new, post-crisis attitude towards trading. Nadex binary options are fully "collateralized." That means that both the buyer and seller of an option are putting up their shares of the transaction in advance. No margins, no leveraged debt.
In the great movie Wall Street: Money Never Sleeps, Gordon Gekko has an over-the-top line, "The mother of all evil is...leveraged debt." Well, that's overstating things a bit, but it is true that you can create a financial exchange that could never even in theory cause the kind of damage that over-leveraged speculation can cause. Nadex doesn't even make margin calls.
As communications manager, I'm not about to suggest "Nadex: we'll never break the economy" as a marketing slogan. But it's a nice thought on a Friday to know that we can't, nor can we ever surprise one of our members with a loss she wasn't expecting. You set the risk up front and then you enjoy the trade. Have a great weekend.
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