July 21, 2010

Markets ranged within NARROW pivots on average volume even though the selling today offset yesterday’s buying.

Short-term: 3 yellow, 1 red – tending yellow
Intermediate-term: 3 yellow, 1 red – tending yellow/green (interesting — the lights are diverging)
Stock targets: 17% swimming, 26% neutral, 56% sinking

Learned something today about these markets. Yesterdays’ range was pretty wide and in candlestick terms “bullish engulfing”. That made today’s pivot points very wide compared to yesterday’s – and that increases the risks for floor traders. Today’s trading was contained (almost exactly) within the narrow pivots — ie the price action was controlled by the floor traders rather than by external forces. But since they make money from the bid/ask — not from price trending; I suspect that they reduce the liquidity they provide to the markets on days like this. IOW — volatility begets volatility. Presumably HFT’s step in on days like this to provide liquidity but still. This is what can potentially cause crashes/meltups. This market was simply looking for an excuse to change price by a lot – from the beginning of the day. It is not external buying/selling (or statements by Bernanke which was the trumpeted excuse today) that does that. Rather it is that — in combination with a market that is brittle and losing liquidity. Not predicting a crash or anything. But it will be very interesting to see how this sort of expanding volatility concludes/reverses. Maybe it does so by finding a solid external bid at a lower price (or an ask at a higher price). Maybe it does so by market manipulation and the PPT. Maybe it does so via a day or two of inactivity and narrow ranges.

A second thing I learned is how scammy the “volatility” ETN’s — VXX and VXZ – from Barclays/iPath are. Today, volatility (VIX) rose by 7.15%. The VXX rose by 0.91%. IOW, the ETN that purportedly “tracks” daily volatility missed by a mere 87% — on precisely the sort of day that investors expect to profit from that sort of hedge. But on days where volatility drops; the ETN provides perfect tracking of the losses. And on days where nothing happens, the ETN pecks its owners to death with obscene “management” fees and options contango. This is a pure fraudulent scam by Barclays — and the hedge funds and HFT clients it knows full well are doing the daily pickpocket on retail investors. And there is no way in hell the SEC doesn’t know this isn’t a three card monte scam so they are absolutely complicit. You have been warned. These things are so much worse than the “ultra” leveraged ETF’s — which themselves are chock full of crap.

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