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Reason to Be Concerned About the Market

Posted by Larry Doyle on July 6, 2011 8:12 AM |

It is a well known fact that an increasing percentage of daily trading volume in the equity markets is driven by high frequency traders. Whether you think that is a good or bad development is currently irrelevant. It is a reality.

That reality has clearly changed the nature of investing and assessing the markets.

How does one invest with a long term horizon when so much of the market is driven by short term traders? Very carefully.

Long term investing requires a solid understanding of fundamental analysis. In the midst of that endeavor, though, investors might want to have an appreciation for technical analysis, which can be utilized across an array of time segments but is very often applied for shorter time periods.

Students of technical analysis will gain an appreciation for overbought and oversold conditions, along with a grasp of market psychology.

Have I lost you yet? I hope not. Let’s get a little more specific and look at an individual poll of active investors and why I think this poll may give investors reason to be concerned about current market levels.

Our Sense on Cents All-Star Laszlo Birinyi publishes a fabulous weekly poll at his site, Ticker Sense. As Laszlo highlights,

The Ticker Sense Blogger Sentiment Poll is a survey of the web’s most prominent investment bloggers, asking “What is your outlook on the S&P 500 for the next 30 days?” Conducted on a weekly basis, the poll is sent to participants each Thursday, and the results are released on Ticker Sense each Monday. The goal of this poll is to gain a consensus view on the market from the top investment bloggers — a community that continues to grow as a valued source of investment insight. © Copyright 2011 Ticker Sense Blogger Sentiment Poll

I would encourage readers interested in the markets to visit Laszlo’s site often. He is an All-Star for a reason.

Why do I think people may want to be a little cautious about the market? Let’s navigate further as Laszlo publishes his July 5th Blogger Sentiment Poll,

Bloggersentiment20110705

Why would I be concerned? When the level of bearishness is so low, it is the equivalent of everybody moving to one side of a boat. You know what happens then, right?

Market sentiment expressing such little bearishness can persist, but ultimately it corrects itself either in terms of price (that is a market retraction) or in terms of time (that is market runs in place).

Navigate accordingly….and make a point of visiting Laszlo in your ‘travels’.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

 

  • Peter S.

    Only a decade ago, almost all trading activity of stocks listed on the NYSE took place in the open market. Now, 80% of the trading of stocks listed on the NYSE takes place in dark pools. Why would that be? How is that an open and fair market? How do you navigate through market activity that you cannot see? What is a sucker to do?

  • fred

    There’s alot of risk out there.

    Unless addressed HFT, WILL be responsible for another “large” flash crash.

    That being said, sentiment indicators are one way for MT-LT investors to mitigate the risk of “swimming with the sharks”. Sentiment extremes often 1)mark changes in long term trend or mark 2)good profit taking opportunities.

    Given the current extreme in sentiment, what should investors do, get out or take profits?

    Most bears argue that the stock mkt is overvalued because profit margins are stubbornly mean reverting (get out), while bulls argue, as always, this time is different (take profits).

    Can both arguements be right? What if profit margins are mean reverting but what if the mean is moving higher? With global employment costs significantly below domestic employment costs, does this change mean? What about the cost of borrowing via the carry trade, does this change mean? Changes in technology improve productivity, does
    this change mean?

    My opinion: the stock market will push the upper valuation band with both big and small corrections along the way. Corrections will occur at sentiment extremes and they will be initiated by HFT. Even with low volume risk (HFT), As an American wouldn’t you rather invest in the US rather than foreign money markets?

    So keep putting your money to work on corrections, and support the efforts of Sense on Cents.

    Why, because given access to global resources, and a level playing field (taxation), I have no doubt that corp America can be world class if Corp tax rates are reduced to zero and uninvested earnings are distributed to shareholders as dividends. Single taxation CAN produce more tax revenue than double taxation.

    How will Americans benefit? By investing in stocks for income over the LT, rather than chasing ST cap gains. For this to work FINRA/SEC need to bring back public confidence by chasing the “HFT cowboys” out of the market.

    You may not have a job, but you can cash a dividend check.

    • LD

      Fred,

      Well stated and thanks for the plug. You do make a lot of ‘sense on cents’ although I would not hold my breath waiting on the HFT cowboys being chased out by either of the ‘cowgirls’ known as FINRA or the SEC.

  • fred

    Nice call LD!

    • LD

      Thank you, Fred. I appreciate the sentiment and will readily acknowledge I have missed many market moves both ways over the last few years.

      In any event, what does Birinyi’s poll look like now?

      Ticker Sense Poll: August 1-5

  • fred

    High Frequency trading programs act like heat seeking missles forcing weak hands to capitulate to strong hands.

    SMALL INVESTORS BEWARE, YOU’RE ON HFT RADAR!

    Ps. You can’t hide in mutual funds or EFT’s either, HFT’s weapon, volitility, WILL smoke you out.

    The solution:

    Fly below HFT radar…go long when vix is high (>30) and skew is declining or go short (get out) when vix is low ( 80%. (Not guaranteed, of course, but great odds).

    If you don’t know what vix and skew are, either find out or stay out. You WILL lose your money.






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