Still in a Fog

Still in a fog.  Stocks could not find their way on Friday as they veered on and off the path throughout a volatile session.  Stocks traversed the gain loss line throughout the day, ultimately giving up early gains and closing slightly in the red.  Though it may be uncomfortable for some, the best strategy for these types of year-end trading sessions is to avoid them completely, assuming that portfolios are properly shored up for the year.  As I mentioned last week, a lot of the volatility in last week’s trading, including a wild +5% rip on the Dow last week, was most likely attributed to large funds and asset managers rebalancing and tax loss harvesting in the year end.  The moves are only made more extreme by intraday algo-based machine trading, which must be accepted as the new norm.  Many intraday systematic trading algorithms attempt to ride micro momentum waves to make a profit.  So for example if stocks are trading in a small range and break out of the top of that range, the algos will initiate some buying and depending on how quickly that move occurs determine how aggressively they will buy.  In a thin market, the algo buying actually pushes the market up further as the buying is often fast and indiscriminate.  By the time the home-gamer day traders start their buying, the algos are already looking for an exit.  Some algos also trigger on news reports hoping to insight panic buying or selling, further intensifying moves in the wake of either economic releases or news reports… or tweets.  To be clear though, the larger trends cannot be blamed on machine-based trading as many asset managers look to blame the algos for their losses.  This month is shaping up to be the worst December since the great depression and it has everything to do with rising rates, trade fears, political unrest, diminishing expectations for 2019 growth, and recession anxiety.  Oh yeah, it probably doesn’t help that we are ending the year in the midst of a partial government shutdown, even though that should have nothing to do with financial markets.

This week will be an abridged week as the world rings in the New Year tonight.  The week will also feature a number of critical economic releases including housing numbers, industrial indicators, Durable Goods Orders, and the monthly employment situation (See the attached economic release calendar).  So there will be plenty for traders and algos to consider in the week ahead. This week will also feature the first wave of institutional buying as asset managers who waited patiently for the clock to strike 12 start their 2019 programs.  Remember that many managers base their success on calendar year results and as the current quarter deteriorated many gave up trying in an attempt to prevent further losses in a rough year.  Once the clock turns they can start with a clean slate and they will most likely start nibbling on their buy list stocks that are trading at reduced values.  In the wake of the weak December there are certainly a lot of stocks for sale, so institutional buying should help to stabilize markets a bit (at least temporarily).  If you are a glass half full kind of person like me, you will note that we still have today’s session to avoid the record loss month and are hopeful for the year ahead.  Have a Happy New Year and please call me if you have any questions.

daily chartbook 2018-12-31

econ numbers 12_31