Morning Market Update
Good morning. Futures are down this morning after jobless claims came in higher than expected…by about 90,000. Last week FOMC chairman Powell addressed the unemployment rate and acknowledged that a 6.3% headline unemployment rate dramatically understates the true damage that has been done over the past year. It’s a good thing for the market that Powell is stating that the headlines cannot capture the extent of the devastation resulting from a pandemic and associated mitigation factors.Focusing on an improving headline number is not much different than–in fact, it’s exactly the same as–looking at your trading account and saying, “Hey, you’re doing great! Look at you! You’re a trader! What are you griping about and why are you discouraged? You’re up 10% this month, and 4% last month!” And you say, “Um, that’s very nice of you to say, but I’m down 80% from where I was one year ago. So a 7% average over the past couple of months doesn’t really move my needle, and it doesn’t improve my financial situation.”
But the bad news about the current financial/employment situation domestically is good news for the market, because it’s a lead pipe cinch that the Fed won’t be hiking rates this year. And once this big uptrend corrects (and they ALWAYS correct…they just don’t correct when we expect them to), we should see an even more dovish Fed. So TINA will always be with us and equities will still be where you want to be. But it’s important to focus on particular stocks that are working, and to stick rigorously with a trading approach that is repeatable. If you do that, then any correction shouldn’t hurt much at all because such corrections are always preceded by little signs such as persistent breakout failures, leaders that become laggards, lack of viable setups (because they all seem to fail), and various other indicia of a faltering money flow. You don’t have to predict. You just need to watch, and think.
The congressional hearings on the $GME, RobinHood, Citadel, and the WallStreet Bets subreddit gang starts at noon Eastern Time today. It should be interesting, but I doubt that it will be substantial. These politicians are all beholden to Wall Street, and specifically to Citadel, the high frequency trading firm that makes literally billions of dollars purchasing the order flow from brokers so they can front run the orders and look for pockets that can be exploited. And some of them don’t know much about markets, and how HFT impacts the market. So the hearing should be similar to the hearings featuring the Silicon Valley bunch, where politicians who can barely spell “internet” grill Zuckerberg, Dorsey, and Pinchai about how their companies control information. It’s like a bunch of ants trying to figure out how the internet works.
Look for the same thing today. The theme will be protecting the little guy. But the aim will be for each politico to get a nice sound bite and video clip highlighting how tough they are on Wall Street and organized crime. Here’s how you’ll know that the hearing is a sham.
1. If the subject of how HFT benefits the market is broached (which I actually doubt that it will be), you’ll hear Citadel make the specious claim that HFT actually increases the liquidity of markets and enhances fair pricing. The proof is in the volume! High volume = liquidity. Of course, this is bull spit…though you actually need to understand how HFT works. When you buy a pair of shoes from a retailer at a particular price, it’s counted as one sale. But when you buy that same pair of shoes from someone who first bought the shoes from the retailer, then it’s actually counted as two sales — one from the middle man buying from the retailer, and one from you buying from the middle man…after he’s marked it up. This arrangement is misleading because it makes those shoes look like they are really in demand. The price goes up, and it happens again and again.
Don’t look for politicians to pursue this line of questioning. They know nothing.
2. I’m sure they’ll grill Vladimir Tenev quite a bit because he’s the “villain” in this story. But he’s not the villain because he cut off trading and consequently did not let his suckers (er…clients) get out of their stock. He’s the villain because he didn’t really run a trading firm. He ran a gaming firm with no internal controls, and he got pinched by the high volume and the ignorance of his “clients” about how trades are cleared — specifically, “T+2.” So his entire company has been a sham because it just presented trading as merely a game that everyone could play…for free!
Don’t expect politicians to ask about this subject. They don’t understand how it works either.
Anyway, gotta go. Have a good day, and I’ll see you in the forum.
–Dan
Market Update