Tag Archives: Trading

the jobs report and last Friday’s trading

October 5, 2015 By in Current Market Thoughts, employment, Employment Situation report, securities markets, stock market, Trading Tags: , , , , , , , 1 Comment

I had decided last week to write today about what happens in an overall market when one or two significant sectors are performing poorly and have weak future prospects.  Is the rest of the market indifferent to the laggards?   or do the weak sectors work to sap the strength of sectors where business is good and the outlook favorable?  This is potentially important, given the miserable performance of the Energy, Materials and Industrials sectors–and the likelihood of no positive news for these areas of the stock market for a considerable time to come.

After I saw the sharp negative reaction of the market to the so-so Employment Situation report released Friday morning, I decided to push that post back until tomorrow and write about Friday’s market action instead.

 

There’s been  lot of discussion recently about the role of computerized trading in influencing the day-to-day, or hour-to-hour, direction of stocks on Wall Street.  Understanding what effect this trading is having on stocks is the first step in the stock market’s judo-like process of beginning to use the momentum of such trading against itself.  For investors like us with long holding periods in mind, one might argue that day-to-day volatility has little significance.  Even so, it seems to me it’s important to be able to read the signals the market is sending    …alao, understanding the rhythms of daily trading can be some help in determining the timing purchases and sales we may be thinking about for strategic reasons.

 

Last Friday, stock index futures fell immediately on the Labor Department release of the monthly ES report.  Stocks fell sharply at the open, an hour later.  Equities remained depressed for about an hour, before beginning a steady ascent through the rest of the day.  The S&P 500 closed on its high.  This is a particularly positive sign, since professional traders tend not to want to hold positions over the weekend if they have even the slightest worries.

On the surface, the ES report isn’t encouraging reading.  The economy gained 142,000 jobs last month.  That was substantially below the average gain for the past year, and it was much less that the 200,000 new positions that economists had estimated.  More than that, the two previous months’ estimated job gains were both revised down.  All of this was emphasized in media reports that were available a minute or two after the 8:30am edt release of the information.

Several important factors weren’t mentioned, however:

–economists’ estimates of +200,000 new jobs were, as usual, very close to the average monthly gain in jobs over the past year, leading me to conclude that getting this figure right is not their highest priority

–that’s understandable.  The Labor Department says that the monthly job figures from its Establishment survey are correct to within +/- 100,000, meaning a “miss” of 50,000 or so jobs contains no statistically significant information

–we’ve seen outlier months occasionally over the past several years.  In each case, job gains have soon returned to trend

–the latest JOLT (Job Openings and Labor Turnover) Survey from the Labor Department shows that the country has 5.7 million unfilled jobs at present, a figure 25% higher than at the previous economic peak in 2007.  This is also an all-time high for the JOLT tally, which makes it hard for me to believe that the September jobs report heralds a significant downshift in US economic activity.

How do I read Friday trading?

I think computers programmed to read news services pushed the market down, both in pre-market futures trading and in the first hour of actual stock trading, as well.  Human traders (smarter computers?) waited for the downward momentum to exhaust itself and, recognizing that this initial move was a mistake, then began buying.

Although I think my analysis is correct–Friday’s trading pattern was very unusual–I also find it very odd that someone (actually lots of someones) would be content to trade on a government report + questionable sentiment indicators.  But maybe that’s the world we’re in today.   If anything, it argues for higher day-today volatility.  It also suggests that there’s money to be made for those with better-than-newspaper knowledge, a trading temperament and time to watch the market closely.

 

 

 

 

ETF and mutual fund problems last week

September 1, 2015 By in ETFs Vs. Mutual Funds Tags: , , , , , , Leave a comment

Both types of fund, exchange-traded and mutual, had issues throughout last week in calculating their per share net asset values .

For fund management firms, the lack of end-of-day mutual fund pricing was a real pain.  For us as investors, however, the ETF consequences were far worse.

mutual funds

The best feature of mutual funds, in my view, is the guarantee that under all but the most extreme circumstances owners can buy in or cash out every trading day after the close at net asset value.   Last week, because of the computer failure at BNY Mellon, the funds that it prices didn’t have NAV information.  So they had to estimate NAV to do daily transactions.

Once they have precise NAV information, they can adjust the number of shares that buyers from last week actually have.  For people who have cashed out, though, it’s not so easy.  If a fund paid too little in a redemption, it must forward the extra to the seller once it finds out.  If, however, it pays out too much in redemptions, most sellers won’t voluntarily return the excess.  The fund may not even ask, either because it doesn’t want embarrassing publicity or because it knows the cost of suing the seller to get the money back will doubtless exceed the potential return.  The fund will presumably try to get BNY Mellon to make good any losses. Failing that, the fund management company has to pony up.

ETFs

ETFs are basically mutual funds that let designated brokerage firms handle the buying and selling for them.  This makes ETF expenses noticeably lower than those of a traditional mutual fund.  It also allows the ETF to trade all day, rather than once after the close.  These are the main ETF pluses.  The offset is that potential buyers and sellers have no assurance that brokers will be willing to transact at any given time and in the amounts they wish to.  We also have no guarantee that transactions will be at, or even near, NAV.  For those of us who are long-term holders or who place limit orders, neither shortcoming should be a big worry.

Then there was last week.

Last week, the ETFs normally priced by BNY Mellon had no current NAVs, only guesstimates.  This had two related consequences for investors:

–Brokers became reluctant to trade, since they couldn’t be 100% sure any bid-asked spread they made would be profitable on both sides (for most ETFs, they had to have had a reasonable idea, I think).

–And they widened the market they made from, say, + / – 0.5% around NAV to a lot more.  On Monday, for example, I decided to throw a long-time clunker in my portfolio overboard and replace it with an ETF.  I soon found that I could only buy at NAV +3%.  And even a small transaction at that price took half an hour to complete.

A lot worse than that happened, however.

The Wall Street Journal offers this account of ETFs during trading early Monday of last week:

“…the $2.5 billion Vanguard Consumer Staples Index ETF …plunged 32% within the opening minutes of trading. The Vanguard Consumer Staples ETF was halted six times over the course of 37 minutes early in the day, according to trading records.

The declines…were notable in that they exceeded the declines in the prices of their underlying holdings. In the case of the Vanguard Consumer Staples ETF, the value of the underlying holdings in the fund fell only 9%, according to FactSet. (my emphasis)”

Yes, Monday was a bad day.  But it wasn’t a terrible, horrible, no good, very bad day, of the type that occurs occasionally in a bear market.  This characteristic of ETFs–that market makers swing the bid price waaay down in times of stress–is one that all of us as investors should be aware of.  As far as I can see, it’s also something the ETF industry has deliberately de-emphasized.  I don’t think it’s a reason not to own ETFs in the first place.  But there will surely be times in the future like last Monday where the price for cashing out is 20%+ of the value of your holding.  So I think most people shouldn’t be holding only ETFs.  Trying to sell them in a market downdraft should only be a last resort.

 

 

 

 

acting in repsonse to last week’s market gyrations

August 31, 2015 By in Constructing a Portfolio, Current Market Thoughts, Fixing mistakes, Keeping Score, Portfolio management, stock market, Strategy Tags: , , , , , , , , Leave a comment

Everybody’s first reaction to a period of falling markets is to pretend that nothing unusual is happening and not look at his/her portfolio.   My experience is that “everybody” includes the majority of professional investors.  There are, however, two measures we can take to strengthen our portfolios if we have the courage to analyse what has happened to our holdings during a volatile period like the past six trading days.

We can:

–gather information, and

–act to modify our portfolio structure.

gathering information

Professionals have performance attribution software, which will calculate performance vs. an index plus a holding’s contribution to overall outperformers/underperformance for any/all of their stocks/funds over any period.  I do the stock by stock performance calculation by hand and then rank the outperformers/underperformers by their impact on the portfolio,  rather than trying to figure out exact performance contribution.  I find that’s good enough.

What I look for:

Aggressive stocks will typically outperform on up days and underperform on down days.  Defensive stocks should do the opposite.  Performing in line with their character is no news.  But stocks that outperform on both up and down days are.  So, too, are dogs that underperform no matter what the daily market direction. I think there’s inevitably a message that the market is sending through such stocks.  It’s well worth trying to figure out what that must be.

Time permitting, we should also look at representative stocks not in our portfolios to figure out the same thing.  (Professionals also have this comparative information, for all the stocks in the index they’re competing against, available at the push of a button.)

Note:  results for ETFs may be problematic, since a computer failure at BNY Mellon, which prices many ETFs for others, made NAV quotes for many unavailable last week.

The S&P 500 was down by 2.3% over the past six days.  Although this is a short time, arguably a defensive portfolio should have done better than this, an aggressive one worse.  If I think I’ve built a defensive structure and my portfolio is down by 6%, I should probably rethink what I’m doing.  If my “aggressive” portfolio is down by 1%, I should be thanking my lucky stars–but also trying to figure out whether this is due to excellent stock picking or to poor construction.  If I’ve accidentally assembled a collection of stocks that acts contrary to what I intended, I’ve probably got to at least ponder how to change it.

Early last week I tossed one long-term clunker in my portfolio overboard and replaced it with what I consider a better stock.  For trades like this, I also ask myself how that’s turned out so far.  Admittedly, a week is a very short period of time.  But this will give me an idea whether I have a good feel for current market action or not.

acting

I’ve often begun the process of analysis and reconstruction thinking that I should make my overall holdings either more aggressive or more defensive.  Almost always, I end up making changes–but they’re virtually never the global ones I’ve intended.  Instead of altering the direction of the ship, I find myself patching holes in the bottom of the boat instead.  This usually improves the portfolio, and it prevents me from dong something crazy wrong during a period of stress.

My alterations tend to be one of two types:

–I trade out of stocks that are underperforming on both up and down days and into ones in the same general industry or thematic area that are performing in a healthier way, and

–I find that chronic clunkers become more visible to my eye in volatile times.  (In my view, everyone’s portfolio has at least a few of these.)  Because they’ve never gone up, they tend to have less downside than stars, whose owners have much more profit to take when they’re nervous.  I find a time like this ideal to switch from the former to the latter.  This ends up being most of what I do.

caveat

For me, the most difficult market transition to read in advance is the shift from a generally upward trend to a bear market, the garden variety of which can last for the better part of a year, and entail losses of, say, 20% in the S&P 500.

Typically, what induces a bear market is recession.  I don’t think we’re in that market/economy situation today.  If it were, patching leaks in the hull wouldn’t be enough.  A change to a more defensive direction would be warranted.

 

 

 

 

 

 

what’s going on in stock markets?

August 25, 2015 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, stock market Tags: , , , , , , , Leave a comment

technicals

From the intraday high of 2132 on July 20th, the S&P 500 has fallen by almost 12.5% to its intraday low of 1867 yesterday.

For fans of support and resistance, 1867 is within hailing distance of the 1820 intraday low for the index in mid-October 2014.  The closing lows at that October bottom were 1867 on both October 15th and 16th.

That all adds up to a severe correction by the experience of the past few years, but still one that might be called “garden variety.”

opposing signals

What’s unusual about this decline is that virtually the entire fall happened in a panic-filled two-day period–last Friday and yesterday.

So this all gives us two opposing market signals.  On the one hand, in the normal two-steps-forward-one-step-backward rhythm of stock markets, we’ve finally made a significant backward step over a suitably long period of time.  One might conclude that we’re done with that phase and are ready for the next up move.

On the other hand, the past two trading days have been fear-filled.  On Friday, the S&P was down by 3%+ and closed on its lows.  Yes, it was a Friday, so brokerage houses flattened their books going into the weekend (translation:  dumped inventory into the market near the close).  Even so, closing on the lows sends shivers down traders’ spines.  Then the market opened on Monday down by about 6%, another stomach acid inducer.  Pundits rushed in to “explain” the goings on to retail investors as a sign that the Chinese economy (the largest, or second-largest, depending on how you count, economy in the world) was imploding–with dire consequences for the rest of the globe.  That increased the fear quotient.

My point here is that emotions are much more powerful that we usually recognize–and they linger.  Maybe the market had been fearful for close to a month and purged that fear over the past two trading days.  But I don’t have the sense that anyone was afraid before fireworks erupted on Friday.  That’s my main hesitation about saying Monday represents a selling climax that clears the way for upward progress.

China not the cause

I think that China is the trigger for what’s happening in markets now, not the cause.

I’m torn between two viewpoints on China as an economy.  I think the hedge funds proclaiming that the selloff in oil and metals is due to economic weakness in China that Beijing is covering up–and that we are due for a protracted bout of global economic weakness–are completely wrong.  On the other hand, either they or their brethren spouted similar nonsense about hyperinflation being induced by Fed action five years or so ago.  Everyone now knows that was totally wrong–yet this craziness struck a responsive chord and influenced stock trading for an extended period of time.

My conclusion:  this isn’t a time to bet heavily on whether the market is going up or down (it almost never is).

trading up

During periods like this, most investors, even professionals, tend to go on vacation.  They just don’t look at the daily ups and downs of prices.  For anyone who can stand the rocking of the boat, however, there’s useful portfolio work that can be done to upgrade holdings.

–clunkers that have never gone up usually don’t go down a lot in general market declines.   Strong stocks that have gone up a lot typically get pummeled.  So this is a great time to ditch the former and use the money to buy the latter.

–we’re in a time of significant structural economic change.  I think the prophets of doom are mistaking that for cyclical economic weakness.  Losers in a time like this are typically large and well-known; potential winners are typically smaller and more obscure.  For most of us, the appropriate switch is from old-line, status-quo stocks into ETFs that are focused on Millennials.