Tuesday, August 3, 2010

The wrong feel

In a comment on the previous post I said that something really bothered me about the market today. Yes, I acknowledge that being long-term bearish during a rather hefty July rally weighed on my psyche. But even so, I have seen changes to the way the market operates for quite some time.

I retreat to the safety of pop culture. Let's start with a modified tune about trading volume, courtesy of Pete Seeger (don;t get me started on politics).

Where have all the retail gone?
Long time passing
Where have all the retail gone?
Long time ago (like since 2008)
Where have all the retail gone?
Institutions have picked them (off) every one
When will they ever learn?
When will they ever learn?

Retail is gone and not in a good way where they think stocks are going to go to zero for a bullish sentiment extreme. Retail is gone because they think the whole thing is rigged. High frequency trading,  bailouts, ETFs and the like all contribute to the feeling.

Don't let the discount brokers get you revved up (you Huckleberry). Retail stock trading jumped the shark last year (see this post) as I wrote here. Football coach Jimmy Johnson did a commercial for a trading software company and botched the terminology. Nobody at the company cared as they though retail stock trading was the wave of the future.  Of course, Jimmy went on to pitch for male enhancement tablets (Jimmy Johnson, that is) so I guess that industry is _______ (fill in the blank), too.

Then there is leverage. The average Joe can trade 3x ETFs and lose money faster than ever before. Too bad nobody realized that these things are mathematically defined to lose money. Prove it yourself. Plot any leveraged long ETF vs. the underlying non-leveraged version. You want to make money without thinking? Short BOTH the long and the short leveraged ETFs for the same underlying.

And in a related note, did anyone learn anything from Lehman? Cousins of ETFs, the ETNs are nothing more than counterparty promises to pay. Great in boring markets although you won't make any money but in Black Swan markets your counterparty may go belly up. Who will pay you for correctly calling the market then?

And finally, the almost-death of capitalism and the free markets. No not in 2008 but in 2010. When will there be a cash for bad trade (clunker) bailout? Save the retail trader!

So, can we make money? Sure we can. But being a day trader seems to encompass a whole lot less risk than being a long-term investor at this point. At least you won't wake up to your portfolio on fire.


bmbull said...

The question is: what has to happen in order to get the whole thing 'unrigged'?

Do 'they' even care if retail comes back? Certainly the machines don't...

Paul O'Cuana said...

Things are crazy out there. What else do you call it when my junk bonds and my intermediate treasuries both hit new highs today for 2010?

The hunt for yield is on. They're all good, right?

bmbull said...

Yup, pretty much everything has been 'good' for the past month or so. Except for the ol' greenback, of course -- but the dollar is looking oversold and due for a bounce, which could throw a wrench into the works.

建邱勳 said...


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