If there’s been one thing that has been most apparent during QE2 (and QE1) it has been the repetitious trading patterns. There’s the Monday rally, the overnight futures ramp, the random intra-day surge and of course, the most obvious one – the buy the dip. If you don’t recognize the pattern you haven’t been paying attention. In essence, every morning dip is followed by a nice steady climb throughout the day. It’s been pretty obvious over the last 6 months, but has been particularly apparent over the last 5 trading sessions:
Like I discussed with the “mystery buyer” – this could be sheer coincidence. But I am guessing it’s not. My guess is our computer driven market is taking advantage of slow trading periods to drive action. Combined with the Bernanke Put and you have a market that is ripe for a unidirectional trade. So, the volume dies out and the computers kick in and take the market where they want. There’s nothing really fundamental about it. During QE it’s as easy as “risk on = computers on”.
There’s nothing conspiratorial about any of this. It just is what it is. We live in a market where modern technology drives much of the action. These profit driven algos grab the bull by the horns and steer it where ever it will result in a profit. But now, in a weird sort of Terminator-like way, we have to wonder whether it’s good that the machines are taking over. I view this is as one more sign of the financialization of our economy. The exchanges are now in the pockets of the banks and as public companies (as opposed to non-profit market regulators) they don’t really care about anything except volumes. Clearly, I don’t think that’s a good thing, however, I’d be very interested in reader opinions.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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