Trading Archive

Australians Love Equity ETFs as Market Assets Surge 39%

Posted November 16, 2017 By

First published by Bloomberg at 

Australians can’t seem to get enough of exchange-traded products as they hunt for low cost investments. The sector posted a 39 percent jump in assets under management during the year to Oct. 31, with equity products dominating, according to data from VanEck Australia and the Australian Securities Exchange. Still, the market commands just A$33.2 billion ($25.3 billion) in assets — a drop in the ocean of the world’s $4.5 trillion ETF market.

The S&P 500 has had quite a run since the early 2016 lows, not experiencing even a slight pullback of 5% or more, leading many to believe that the market would wobble during the seasonally weak period of August and September. Over the last twenty years, the market has rallied only 55% of the time during August and only 50% of the time during September, losing on average 1.0% and 0.80%, respectively, in those two months before strengthening into the final three months of the year.

seasonality chart

This year’s current path has remained strong, bucking the normal seasonal trend as the S&P 500 hits new all-time highs. This is shown below with the year-to-date performance of the S&P 500 shown by the solid line relative to the 30-year seasonal average.

spx index avg
Source: Bloomberg

With August now behind us, bears are still holding out for a major pullback the last few weeks of September. Unfortunately, the message from the credit markets is not giving them much to stand on.

High yield (junk) bonds often serve as a canary in the coal mine and a good example of this was in 2015 when the BofA Merrill Lynch High Yield Index began to weaken several months before the August 2015 summer correction. Then, as the S&P 500 staged a strong recovery, junk bonds continued to sell off through the remainder of the year, eventually pulling the S&P 500 down a second time.

sp500 boa merrill lynch yield
Source: Bloomberg

Just as the junk bond market led on the way down it also led on the way up, confirming the bottom in February 2016 and then hitting a new high in June, one month before the S&P 500 did the same. So, given the high yield bond market can serve as a useful tool to gauge market risk, what is its current message?

“Don’t Worry Be Happy Now”

The junk bond market is echoing the words of Bobby McFerrin’s famous song as it experienced only mild weakness in the last few weeks and hit a new high last Wednesday, ahead of the S&P 500’s new highs seen on Monday.

sp500 boa merrill lynch yield 2
Source: Bloomberg

The message from junk bond indices is being confirmed by investors′ fears of corporate bond defaults as measured by credit default swaps (CDS) on investment grade (IG) and high yield (HY) bonds. While the S&P 500 didn’t peak until the summer of 2015 before it went through a rough 6-month span, bond investors were getting uneasy a year earlier. The CDS indices on IG and HY indices bottomed in the summer of 2014 and default insurance began to rise heading into 2015 and really picked up steam just before the summer 2015 correction, giving an early warning to anyone listening of coming market turbulence.

sp500 markit cdx
Source: Bloomberg

Major bond investors are signing McFerrin’s song as the cost of CDS protection has fallen since early 2016 and is closing in on the lows seen in 2014 with no early warnings present.

sp500 markit cdx 2
Source: Bloomberg

From a stock market breadth perspective, we are also seeing some encouraging signs of improvement. My last article highlighted that market bottom conditions had not been confirmed (link) but we are now seeing technical evidence to the contrary. For a solid bottom in the markets, you want to see oversold conditions materialize that create enough buying enthusiasm to suggest prices got low enough to bring the bulls back into the markets. Oversold markets that lead to little buying interest tend to be “dead cat” bounces in which even lower prices are needed to entice bulls to enter the markets once more and a bottom to form.

One measure I use to gauge an oversold market is by tracking the underlying behavior of the 3000 stocks in the Russell 3000 Index, which represents 98% of the entire US market capitalization. In the middle panel blow, we measure negative momentum with the percentage of members with their MACD line in positive territory. Readings of 30% and below tend to mark oversold markets and, in late August, we reached the most oversold levels seen since the November 2016 elections.

To answer the question if prices moved low enough to entice bulls into the market and signify a low, I look for buying enthusiasm as evidenced by a surge in positive momentum measured by the percentage of stocks that experience a MACD buy signal. On that front, the recent rally has led to the strongest surge in momentum since the February 2016 lows as nearly 40% of the 3000 members in the Russell 3000 experienced a MACD buy signal (third panel below).

russell 3000 index
Source: Bloomberg

Bottom line: Given little signs of anxiety coming from the credit markets and a resurgence in market internal momentum, it appears as though the path of least resistance is higher and bearish hopes of a market decline in the seasonally weak part of the year are unlikely to come to fruition.

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This article was originally published by Financial Sense at

Today’s chart comes from Jason Goepfert at Last month, Jason told FS Insider that sentiment readings were reaching extremes, even surpassing 2000 tech bubble-levels of euphoria, which was a “very troubling sign” for the stock market (see Rydex Trader Bullishness Surpasses 2000 Tech Bubble).

This most recent data looks at the total number of Hindenburg omens for the S&P 500, Nasdaq, Dow Jones Industrial Average, and the Russell 2000. In sum, “we’re seeing a market that is split between winners and losers to a degree rarely seen in history,” Jason wrote in yesterday’s Sentiment Report.

hindenburg omens market tops

You may be asking yourself, what is a Hindenburg omen? Here’s what Investopedia has to say:

DEFINITION of ‘Hindenburg Omen’
A technical indicator named after the famous crash of the German airship of the late 1930s. The Hindenburg omen was developed to predict the potential for a financial market crash. It is created by monitoring the number of securities that form new 52-week highs relative to the number of securities that form new 52-week lows – the number of securities must be abnormally large. This criteria is deemed to be met when both numbers are greater than 2.2% of the total number of issues that trade on the NYSE (for that specific day).

Additionally, they write:

Traders use an abnormally high number of 52-week highs/lows because it suggests that market participants are starting to become unsure of the market’s future direction and therefore could be due for a major correction. Proponents of this indicator argue that it has been very accurate in predicting sharp sell-offs in the past and that there are few indicators that can predict a market crash as accurately.

For regular updates on market sentiment and other technical measures, we encourage our readers to follow SentimenTrader’s daily reports and research. You can sign up for a free trial on their website (, follow them on Twitter @sentimentrader, or through their premium feed at $10/mo by clicking here.

Read next:

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

Point & Figure Diary

Posted July 20, 2017 By

Artricle originally published at by Bruce Fraser.–figure-diary.html

Regular readers have been following the epic saga dating back to 2011, when Dr. Hank Pruden published his Point and Figure (PnF) count for the new bull market. This count projected to a range of 17,600 to 19,200 for the Dow Jones Industrial Average ($INDU).  When this objective was met we said: ‘But wait, there is more’. Almost exactly a year ago, in this blog, we revisited the original Accumulation and found that an additional count could be added to the PnF price objective.

The 17,600 to 19,200 count was very useful as the $INDU was stopped in this range for more than two years. That range produced a Stepping Stone Reaccumulation PnF count.  The larger Accumulation count and the new Reaccumulation count approximately confirmed each other (click here to review these PnF charts). The cluster of count objectives target 22,000 to 24,500. As we move toward these price targets, new Reconfirming counts continue to be generated. This brief update is to illustrate a new count that arrived in the month of June since our last post on this topic (these PnF counts can form quickly).  Links to the prior posts are below.

We use 60-minute data and ATR (20) scaling to generate this PnF study.  In the month of June, a Reaccumulation formed matching the previous and larger PnF count. Recall that when the Reaccumulation count approximately matches the prior count the trend is often set to resume. This week $INDU jumped to a new high just as the most recent Reaccumulation equaled the prior objective. This is an obscure timing tool that often comes in handy (click here for more on this technique).

As the Dow Jones Industrials stair steps upward, it is appropriate to ask if the count generated from the chart above is the final high? Recall that our price objective window reaches to nearly 24,500.  We will continue to use our Wyckoff tool box of chart analysis, trendline studies and Point and Figure counts to light the way to the conclusion of this campaign, wherever it may take us.

All the Best,


Additional Reading:

Point and Figure Pie in the Sky? (click here for a link)

More Pie. Bigger Sky! (click here for a link)

A dangerous optimization assumption with Perry Kaufman

Posted July 17, 2017 By

Click here to view on YouTube.

From Better System Trader:

“I was reading an article on a trading website and the author was making some assumptions based on the optimization results which may not have been entirely accurate. I think alot of traders can get caught up making this same assumption… I know I definitely have…

And it’s good to be reminded of these types of things so we don’t make the same mistakes.

Listen to Perry explaining what this assumption is, the danger in making it and how to overcome it.”

  • “Fundamental discretionary traders” account for only about 10 percent of trading volume in stocks today, JPMorgan estimates.
  • “The majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,” said JPMorgan’s Marko Kolanovic.
  • JPMorgan believes the recent sell-off in technology stocks may have been related to quantitative and computer trading and not traditional fundamental investors.

by Evelyn Cheng | @chengevelyn
Tuesday, 13 Jun 2017 | 4:49 PM ET

Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.

“While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,” Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.

Kolanovic estimates “fundamental discretionary traders” account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.

In fact, Kolanovic’s analysis attributes the sudden drop in big technology stocks between Friday and Monday to changing strategies by the quants, or the traders using computer algorithms.

In the weeks heading into May 17, Kolanovic said funds bought bonds and bond proxies, sending low volatility stocks and large growth stocks higher. Value, high beta and smaller stocks began falling in a rotation labeled “an unwind of the ‘Trump reflation’ trade,” Kolanovic said.

“Upward pressure on Low Vol and Growth, and downward pressure on Value and High Vol peaked in the first days of June (monthly rebalances), and then quickly snapped back, pulling down FANG stocks” — Facebook,, Netflix and Google parent Alphabet, the report said.

Along with Apple, the big tech-related names fell more than 3 percent each last Friday and dropped again Monday, sending the Nasdaq composite lower in its worst two-day decline since December.

However, “the contribution coming from quant rebalances to this snapback is now likely over,” Kolanovic said, noting that S&P derivatives have supported market gains at the beginning of this week.

“$1.3T of S&P 500 options expire on Friday, and this will change dealers’ positioning,” he said. “This can result in a modest increase of market volatility starting on Friday and into next week.”

Tech recovered Tuesday, helping U.S. stocks close higher with the Dow Jones industrial average at a record.

Derivatives, quant fund flows, central bank policy and political developments have contributed to low market volatility, Kolanovic said. Moreover, he said, “big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come.”

Figures from market structure research firm Tabb Group point to similar gains in machine-driven trade volume, while the overall number of shares traded has declined.

A subset of quantitative trading known as high-frequency trading accounted for 52 percent of May’s average daily trading volume of about 6.73 billion shares, Tabb said. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.

To be sure, not everyone on Wall Street is giving ground to the machines so easily.

AllianceBernstein analysts made the case in an April 28 note that artificial intelligence is unable to generate significantly different results — by the mere fact that analyzing more and more data results in increasingly similar strategies.

Evelyn Cheng CNBC

Learn the Benefits of Footprint® Charts

Posted June 12, 2017 By


Click here to view on YouTube.

Trevor Harnett answers the question of why some traders always seem to have a better read on the market.
You will learn:
– What Footprints are
– How Footprints help traders
– Practical methods for using Footprints in various markets

Rookie Currency Traders Are Causing Trouble

Posted March 23, 2017 By

It’s been something of a common lament among Wall Street veterans for a while now. And it goes, more or less, like this: All these darn twenty-something-year-olds around here have no idea what they’re doing.

Perhaps it’s just the typical grousing of community elders, but last week, the Bank for International Settlements said there may be something to the notion.

Tucked deep into a report on foreign-exchange market liquidity was a brief paragraph on how rookie traders could be partly to blame — along with falling volumes and the growing prevalence of electronic trading — for the flash crashes that have roiled the $5.1-trillion-a-day currency market over the past two years.

One case the BIS found particularly worrisome was the time last October that the pound plunged 9 percent in a matter of minutes during early trading hours in Asia. The organization concluded that “less experienced” traders handicapped by a limited knowledge of which algorithms to use at that moment “amplified” the rout.

For Keith Underwood, the report just confirmed what he’s known for a long time.

“If there’s a shortage of senior people, there’s a shortage of knowledge,” said Underwood, who runs his own foreign-exchange consulting firm after a 25-year trading career that included stints at Lloyds Banking Group Plc and Standard Chartered Plc. In his trading days, he said he was leery of handing off positions to junior staff in other regions overnight. “I’ve certainly adjusted my orders, and I’ve also adjusted my sleep.”

Younger, lower-paid employees make up a greater percentage of trading desks today than they have in years.

Part of banks’ broader effort to cut staff, boost electronic trading and lower costs following the global crisis, the “juniorization of Wall Street,” as some call it, has been especially acute in the foreign-exchange market. The world’s 12 largest global banks cut front-office staff by about 25 percent in Group-of-10 currency markets over the past four years, according to Coalition Development Ltd.

That’s coincided with a shift to automation, which slashed staffing needs and spawned a new, and small, generation of quantitative traders whose decisions are driven by mathematical models. For every managing director with about 10 years or more on the job, there are as many as seven less-experienced staffers on currency desks, Coalition said. The ratio was one-to-four just five years ago.

“The old hands who have seen crazy things happen, they’re gone,” said Michael Melvin, a professor at the Rady School of Management at the University of California San Diego and a former managing director at BlackRock Inc.

‘World Is Ending’

BIS’s write-up on the effects of juniorization, which stemmed from discussions with market participants, echoed conclusions put forth in an earlier study that BIS staffers did in tandem with the Bank of England.

Franz Gutwenger, a recruiter in New York, estimates that about 75 percent of recent job openings at banks’ currency desks were for candidates with three to five years of experience. The advertised roles are mainly for assistant vice presidents with base salaries of up to $150,000 a year, or vice presidents who earn about $200,000 a year. That kind of pay is a fraction of the salaries that top traders can make.

Having so many inexperienced people manning a trading desk is risky, Gutwenger said, and senior staff should be on hand in critical situations. Melvin said that many young traders can panic and think “the world is ending” when suddenly exposed to a market crisis.

Read Next: Currency Traders Race to Reform ‘Last Look’ After Bank Scandals

“For many of the jobs, day-to-day, it’s all good, there’s no issue,” he said. “But when extraordinary events happen, it really is useful to have some seasoned old hands around.”

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