market chaos


This post is perhaps a little outdated, but I write here to figure things out for myself, rather than to impress you, fictitious reader (FR) with my brilliance, and this is an unclosed loop that began with a post 10 days back, so now I’m gonna close it. First, a couple charts, courtesy of the fine folks at FreeStockCharts (and some very old-skool manipulation on Mr. U’s part, ah well…)

$SPY 2009 daily chartThis is a daily chart of the good ol’ $SPY for 2009. Hopefully it looks familiar enough to anyone reading this (and if you’re trading without charts, uh, why?), showing the infamous V. I add a single trendline to show you just how momentous this week’s action may have been to coming weeks’ action. A broken intermediate-term trendline, with a backtest point at a flat 5-day moving average, does not look easy for bulls.

As you can perhaps guess from the two arrows, I’m interested in a couple particular moments as they relate to government and its ability to create and destroy tape. The dates are February 10–the day Geithner gave his first stress test speech–and May 4, the date the stress test “results” were released.

Now, you may or may not remember the action immediately preceding February 10 (arrow #1), and what happened on that day. I remember it quite vividly, because February 5, 6, and 9 saw some real buying strength. On diminishing volume, granted, but I could “feel” the market wanting to rally. (And set myself up, painfully enough, accordingly, but that’s another story.) And then, on February 10, after some light morning selling, Geithner stepped up to the mic at 11 a.m., and literally as he opened his mouth, the market started to drop. Hard. And didn’t quit for another month, is the short version of the story.

Then, over the weekend of March 7-8, Citibank said they’d had a couple of good months, the market was even more deeply oversold, and we were off to the races, punctuated by a series of very cheery announcements from the financial industry, the second-derivative news, and the stress test progress, particularly some leaks (strategic or otherwise) in the final few days before May 4 (arrow #2), when the results were originally meant to appear, or May 7, when the results actually did come out. That week began with a fresh breakout, and ended with the rally high thus far, all, I would venture to say, stress-test related.

You can probably see where I’m going with this: I would venture to say that, in some form, the very same stress tests “caused” a fat drop and an equally sharp rip right back up. The government position, if you followed along, didn’t really change: They said the tests would be relatively low-stress, meant to reassure above all, and the results were apparently ugly but not too ugly, but regardless and in the meantime the market kep about what they meant. Somehow, against this policy, the market managed to convince itself 1) that banks would be nationalized when they failed their tests (with plenty of punditology backing them up in the 24/7 squawk boxes, and the government promising it wouldn’t happen) and 2) that the stress tests were a government sham, and a way of avoiding nationalization.  What I find fascinating is that policy got blamed for two contradictory versions of the story, while the market merely mean-reverted, basically ignoring version #2. To clarify: if the banks were to be nationalized, a plummet in share value makes sense, as shareholders feared being wiped out. But if the stress tests were too weak, and th$SPY 2009 daily chart, stress-free editione government was wallpapering over deep cracks in the system, the market should have dropped farther. In terms of sticking to message, the government has been far less schizophrenic than the market.

But I really wrote this to commit a TA cardinal sin, and offer you this second chart. It’s just like the first, but a stress-free edition–it jumps from Feb 10 to May 4. Strap on your tin-foil beanies, and note just how smoothly February 9 would lead us into May 4-8. If you omit the we-hate-Geithner’s-beady-eyed-voice day, you could draw a damn trendline right up it. And why is everyone now watching 875 so carefully? Government be damned: Eliminate the market schizophrenia of February, March, and April, and you have a range-bound market oscillating around it. (As an aside, I cannot imagine a clearer picture of just how important current support is than what this chart shows. Too bad it’s fabricated!)

I have one more trick up my sleeve. If you follow me on twitter–and, y’know, why wouldn’t you? I do–you have heard me grumble and moan over the lack of consolidation all the way up this “rally”, and the ripping behavior and leadership the financials have shown throughout. If I had no more than one sentence to deflate the rally excitement, that would be it: the financials are still dragging the market around by its peroxide-free roots, despite being deeply broken, and demonstrating a most convincing failure of leadership on every economic front possible.

$XLF 2009 daily chartYou could perhaps guess what the next trick is. At left, the same 2009 complete daily chart for $XLF. Note a similar break of the simple rally trendline the last couple days. Note the positions of the market at the stress-test inflection points of February 10 and May 4-8.

In keeping with the above summary of rally-hype deflation, I present you with a similarly mangled chart. The trendline has been broken and its backtesting is in line with a break, but note how far above their early-February level the financials still hang. Either February was too low already, or in May we’ve overshot–in other words, the financials market has spent much of this year overreacting to the$XLF 2009 daily chart stress-free stress tests, in both directions, relative to the S&P. I am not alone in saying we’re overdue for a correction; reasonably, the longer overdue the correction, the more severely participants might react to it, having lost the habit and/or settled into greed; the breaking of the trendline tells me it’s coming, and the big blank space above the February line says it’s got easy room to fall.

Not that this sort of nonsense technical analysis carries any real significance. My broader point is that any reaction to government “intervention” you might read in the tape is disortion, not commentary. We’ve had at least a two-phase reaction to essentially the same government activity. Plenty of other factors have played in the traffic as well, naturally, the most obvious of which is just good ol’ time. I believe Phase 3 is now underway. No doubt traders will yelp about the government having caused it, too.

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Dissecting irrationality is a hobby of mine, and the trading community offers fertile material. Take for example the endless trust of the tape’s absolute rightness (yep, a theme here) alongside the endless carping over one government action or another and how it’s destroying the market. The short version of how silly this is goes as follows: if the tape responds only to itself, it doesn’t care what the government is doing. And if government action is driving the tape, well then the tape isn’t a gauge but rather a consequence, and can hold no intrinsic rightness at all.

As a skeptic, I doubt the soundness of the tape–and, by extension, the supposedly free market–at judging anything. I also doubt government’s ability to get things right, but I will take the actions of officials held at least marginally accountable by a marginally vocal and voting populace over the untethered reckless and fraudulent behavior of the free-market bong-hitters who engineered this shitstorm as a decade-long ode to deregulated greed any trading day of the week. (How’d the tape–and so many traders in it–miss that engineering? But I digress.)

The reason the two ideas sit side-by-side in so many minds, of course, has nothing to do with logic, and everything to do with ideology. People who believe one should make  more money off the money one has made or inherited (and if someone made money, then it was, quite literally, at someone else’s expense–in this ideology, somebody “worse” at, uh, making money–but I digress) tend to slap at the hands of grabby government, and believe that the market rewards what they already believe–money is an earned reward or a taken punishment, and capital is raised by raising profit, and lowered by failure to grow. Market smart, government dumb, because markets rule, and government just screws them up, is the short version.

But applying that ideology as an explanation of trading-market action is an example of the fallacy known as begging the question (itself an ill-used phrase, but that’s yet another digression). You do not prove that policy adversely affects economy by saying, “The capital markets are being destroyed/propped up by the government!” because if by definition they are free–the 1P here–they can’t be destroyed or made whole by anything but themselves. The basis itself is questioned by the conclusion. (It’s also questioned by the fact that said market is a government construct, but oh well.)

As a skeptic of all kinds of conventional wisdom, I have plenty of opinions about recent government action and market behavior, but they are plenty boring and for the most part irrelevant to this blog. What is key here in my ongoing crusade against the rightness-of-the-tape farce is that the volatility of recent market action–I’m going to be talking about 2009 only here–has sparked endless bitching about how badly the government is handling this crisis, how the Treasury and Fed teams under Bush and now Obama are making things worse than they need to be, etc., etc.

Maybe. But maybe not. The revelations that banks may have been strong-armed into taking capital infusions and the many cozy connections between government money and kingpin banks, to this ideology, and while those two revelations might inspire concern for all sorts of reasons, to tape-believers they are outrageous. It must be tricky to be outraged at both and still maintain a clean ideology (the ideology says the government seeks to thwart the free-marketeers, while in fact these stories add up to a government playing both for and against the market, at the same time!), but they’re really only looking at the stories as counter to their broader belief, which is that government should just step the eff off, except for a little regulation here and there (not by bankers but by… failed bankers? after all, working for the government is working for the enemy), and let that righteous dude The Tape sort it all out.

What a buncha nonsense.

The tape (by implication, in many ways a proxy for the market itself) is just a fluctuating unknown-ratio measurement of past, present, and future. A whole hell of a lot of fluctuation, as any fool watching price action in real time should be able to conclude, is made up of guesswork, of both the consensus and contrarian varieties. It’s an adding-machine tape of perceptions held and strategies employed. A battlefield, sure, and with tactics of equally deep pride and folly, but a bible?

As I’ve said here before, its timeframe has absolutely nothing to do with policy’s timeframe. Take, for example, stimulus spending: how long until its effects kick in in the tape, if they do? Or have they already? When will the market have fully absorbed its primary, secondary, tertiary effects? Good luck herding those cats. But it’s not only the timeframe, it’s the scope of action: investing and trading are about profit fabrication in pursuit of life-liberty-happiness-etc., but government gets to just skip that minty middleman, and go straight to ensuring LLH.

Real-time mass culture foolishly believes that because there is so much real-time judgment flying around, we’re better at making real-time judgments, primary and secondary. (Another question begged.) Real-time ticks have perfected the tape! The proliferation of round-the-clock media and internet prognostication is not proof of its necessity at all, any more than an advertisement is proof of a product’s value. The fact that we won’t shut up with our opinions, and that we are constantly bombarded with the opinions of others, does not mean we are better equipped to gauge the utility of any one opinion. And skilled judgment of one kind doesn’t imply skilled judgment of all kinds; e.g. being a good tape-swami and therefore a good trader–a formidable and uncommon skill–doesn’t mean you know shit about the economy and where it’s going.

If tape players are collectively and in real time passing judgment on this government rather than the relative health of industry, then the tape is even more distorted than it appears on the surface, because we’ll only know how well today’s policy did solving yesterday’s problems after many tomorrows, when the tape will look as (in)coherent and (in)accurate as it always does in hindsight. And in the meantime, new things will happen that will further distort our ability to read today’s tape objectively, and that will make the stimulus spending look like a much better or much worse idea than it “actually” “was”. Not to mention that we’ll never get to go back and redo it all.

This year’s volatile market action has included a violent drop and a violent rip, and throughout it all the chorus of man-the-government-is-doing-this-sooo-wrong has continued more or less unabated. Of course, when the indexes were dropping, that was the government’s fault; why it has climbed so relentlessly is blamed on any number of factors from short-covering to green shoots, but needless to say, credit to the government in equal measure to the scorn heaped on during the drop (and the mid-January to early-May V is quite symmetrical) is nowhere to be heard. Neither market judgment of the economy, needless to say, has been proven to be of value (presumably, the state of things has not so radically altered as to be badly broken and then table-thumpingly sound inside of three months), and with the benefit of sizable retrospect, one or the other side of the V is going to look pretty wrong, whether policy has saved the market, doomed it, or had no effect whatsoever.

The second part of this post will examine this year’s market movement from a fresh and completely unsound chart perspective, looking at the inflection points on Feb 9 & 10 and March 6 & 9 for what they are–moments of herd mentality shifts, trader- not tape-driven, with zero truth in them, and only the most tangential and ideological relationship to government–and at a scenario where the tape would actually have been righter. Start counting the seconds.

There are lots of reasons for a guy like me to stay primarily on the receiving end of trading advice, which is part of why this blog–and even my twitter posts, really–don’t, and usually won’t, offer any. Rounding up other people’s analysis is a better way of pointing the (slightly less fictitious, I must admit) reader to useful thinking.

But as I’ve been trading less and less, I’ve had lots of time think about just why I’ve been so carefully hedged, and even net short since the fourth or fifth week of the rally, and why it is that I closed out so many longs “before they ran”, and then Howard Lindzon’s great post this morning got me thinking about it some more, and so, in fine reflection of current market action, I managed to break through to a new realization using nothing but the ideas in my head.

Before I grace you with my revelations, a little background: my general position is one of skepticism. I am neither bull nor bear; out of October’s huge up day, I expected the rally now underway to emerge at any time, especially in the November and January attempts, and did not let go of a basically long bias until mid-February. By that time, even though I thought the market was oversold, I had digested enough information to know that the state of the economy was a lot worse than I had thought, even a few months before, and I was willing to accept that a severe correction was in order and underway. Very low index predictions I had once thought insane–say, Dow 6000–began to seem much more realistic.

This rally began, and I played along for a while, but the horrible news just kept coming. And it hasn’t stopped, by any stretch, as just about every link you can follow from this blog will indicate. (And the blog is mere weeks old.) By the end of March, there was an excellent technical case to be made for skepticism: the rally was gappy, jumpy, panicky; the dips were few, and bought immediately; the gaps up were many, and left unfilled; no support was building along the way; volume was not coming in. Increasingly, we were rallying off of… rallying. Not sustainable.

But there are always multiple technical cases to make, and this rally has ignored mine. Market chaos continues to act all organized, trending up pretty relentlessly. I wake up one day, find an old long position healed and profitable, and sell it into strength, counting myself lucky to have gotten out from under a bad buy I should have stopped out of weeks or months before. Then I wake up the next day, and find more strength, and feel like a chump.

Selling too early sucks, no doubt about it. Trading hindsight makes it especially painful–a parasite, because of the way a chart of the past pretends to reveal a pattern you should have seen all along. Of course, in real time, the pattern wasn’t necessarily there. Making the case after the fact is the bread and butter of technical analysis. I suspect that a poll of traders’ expectations at the end of March would not have shown a majority predicting the April we went on to have.

In any event, if you sell early to lock in profit, or get stopped out of a position that proceeds to run, you haven’t made a mistake, per se–you have effectively managed perceived trading risk. Your risk-management skills may be lacking, but that is a separate problem; at least you’re employing them. Not employing them in favor of tea-leaf reading is pure gambling, and either sets some foolish precedents by paying you off, or spanks you in the trading account to remind you not to gamble.

My big mistake wasn’t closing my longs–it was expressing my skepticism of the rally by adding shorts. Here was how my initial reasoning went: I had some longs left, I figured the rally would tire any day, and when things pulled back, I just wanted to be hedged. I chose weak names that had rallied hard, or weaker names that had trouble getting off the mat, and held them as portfolio insurance. A mistake that grew out of a previous mistake, which was holding onto losing longs too long, out of skepticism of the previous drop.

I hope you can see where I’m going with this. You might think that holding a losing position just causes you to put off an eventual loss. What I’m trying to make clear is that with a couple extra add-on thoughts, staying in a losing position can make you open a second losing position. This is precisely what happens when a trader “averages down” on a trade. You might think that because you’re trading the same name and lowering your break-even price, you’ve only got one position to manage. You’re wrong–you’ve got two, one hidden behind the other, and if the price of the name keeps moving away from you, you’re losing money on both.

My skepticism is not what hurt me here, though I jump up and down on it every day these days for keeping me out of some stupidly easy gold-rush trades. The essence of it is this: the proper trading position for a rally skeptic is cash, not short. And that’s the proper position for a crash skeptic, too.

If you disagree with market action, if you believe it cannot possibly continue, cash is the only defensive trading position. Whether short or long or hedged or condored or strangled or bungeed or expialidocioused, whether the market is crashing or surging or crab-stepping or cake-walking, if you hold a position you’re on the offense.

There is no way to “open a defensive position”, except against your own offense. Two offensive moves do not a defense make.

Ahhh, a new month, spring is in the air, and time to digest a fresh media-master’s pronouncement that we have reached the start of a new bull market. Okay, “Sumner”, if that’s your real name (I’m kidding! it must be–a name only a mother could love), whatever you say! Granted, you’re a zillionaire media mogul and I’m Schmoey Smurf with a broken trading account full of fundamentally sound but technically inexcusable shorts, but spout baseless trash talk like that where gormless average-joe investors can hear you and I’ma call you out: You’re not fit to drink the pinot noir juice I’ll be wringing out of my hangover socks tomorrow morning. And tonight, I’ma toast that shit all night long.

I’ve been talking up media/market momentum since this blog began way back in April of ’09, but pundit/market momentum–or even crackpot dimestore analysis from an empire builder–is a whole other animal. Oh I beg your pardon “Sumner”, I shouldn’t paraphrase. Let’s hear it from straight from your horse’s ass’s mouth, shall we?

I think we’re in the beginning of a bull market. When a bull market begins, nine months later the economy turns around.

Oh, is that how it works? Mind if I paraphrase now? Thank you, sir. You are truly gracious.

A bull market is just around the corner, because I have visited January 2010 in my Viacom Timecopter, and January 2010 wanted me to tell you guys that it has an “economy”, and it’s all “fixed up”. So, go ahead and buy some stock today, so you don’t end up paying too much for it later! Might I suggest a generous helping of $CBS, due to report earnings May 7? Oh yeah, in case you were wondering, on my way back from January 2010 I stopped by May 7, and it turns out we had exactly the kind of quarter you have 9 months before the beginning of a bull market, which is very bullish for 9 months from now. January 2010 congratulated me on that quarter, in fact, before I even went there. The future is totally awesome, I think.

Oh, now I get it. Seriously though, his logic looks exactly like this rally’s logic: as long as people keep buying every dip, and prices keep going up, the economy is going to recover when we say it will. Never mind the reams of cogent analysis from crack econowatchers like Zero Hedge and Calculated Risk with a bunch of pesky “data” and “facts” and “charts”–the wind is at the back of the bulls, and that’s the right time to say that the wind will be at the back of the bulls.

If you recall, back in late February and early March when there was day after day of selling, lots of “how low can we go?” articles began popping up. Breaching 700 on the S&P was a huge deal, and the selling was so relentless it looked like it would never end. It ended. Now, after eight solid weeks up or nearly up, the punditedia has started putting out “maybe it’s the real-deal rally” pronouncements. They ride a trend right off the right side of the chart into spec-u-land.

Market trend is useful stuff–no one makes that case better than Howard Lindzon–but these are not rational markets, and their trends cannot be trusted. The brokenness can be very profitable or very destructive for trading, but don’t confuse one-way movement (January to early March short, March to now long) for proof of anything, unless it’s desperation: panic selling, panic buying, panic short-covering. What the bulls feel is a breeze–the longer-term wind is still at the back of chaos.

Remember that projections in the media–especially but not exclusively those of the soothsaying species punditrionus whiffleballia, and and those strewn like so many crumbs of wisdom from the top of the org chart–are sold before they can be proven, and will not be disproven before having been bought and forgotten. What does it cost Goodfellow Redstone to make such a pronouncement? Nothing but a couple blog rants from Schlumpy Smurf the Rally Skeptic. (Yeah, there’s likely to be a follow-up post down the line. Start counting the seconds.)

I shouldn’t pick on the guy; he has clearly jumped the marble. The problem is larger than what the batso kingpins have to say, at any rate. In light of the facts on the ground I linked to above, I find articles like this one from Jon Markman disturbing in a different way. He’s clearly a brighter guy with more knowledge of these things than I, and makes a very reasonable argument for what might keep pulling buyers in even after a sharp 30% run up, but I get worried when I read summary analysis like this:

Considering that at least half the economic cycle is about confidence, just shoring up the psyche is enough to get the ball rolling. Whether you call it green shoots or little green men, good stuff is happening out there in the real economy: Layoff announcements are receding, new unemployment claims are declining, U.S. business and consumer confidence is rising, Germany’s business activity is quickening, South Korea’s gross domestic product is picking up, U.S. existing- and new-house prices and sales are ticking up, Japanese exports are swinging higher, Taiwan’s leading index is higher, and container exports at the Long Beach, Calif., harbor are rising.

Notice the confident tone along with the confidence he’s seeing in the indicators. None of which are really specific, and several of which are actually clearly contradicted in the links above, but I digress. A lot of those assessments only stand if you compare them to a month or six ago. Of course, things have to stop getting worse before they get better, but there’s no guarantee they’re going to do that in snap-back fashion. He might just be saying there is some confidence that the bottom is in, but the writing sounds like the writer believes things are looking up. These two things are not synonymous. It is infinitely possible to crawl or bump along or oscillate around a bottom for a very long time. It is equally possible to start getting better and then get worse all over again.

The second-derivative misperception is very strong right now, and even a mastermind like Mr. Kass would now seem to agree with little ol’ Mr. U that less-bad news can’t prop this rally up forever, and will soon be as ignored as the regular-bad has been of late. Some of the data is still pretty terrifying; consider this adjusted GDP perspective courtesy of Barry Ritholtz. The pain has not ended, and if media makers great and small walk around pumping their ideas into the minds of people who don’t spend their days sitting around figuring out what to trade but do want to invest wisely for their retirement or their kids’ education or their Hobie Cat, and then the markets fail to confirm and those people have to sell the retirement, the kids, and the boat at a loss, the pain is actually prolonged. Much of which could be avoided if certain people would just suck on a Ricola, recount their zillions, and shut the hell up.

But enough thinking! Let’s see what else “Sumner” has to say.

The reason we have not gone to newspapers is because its a slow growth industry and I think they are dying. I’m not sure there will be newspapers in 10 years. I read newspapers every day. I even read Murdoch’s Wall Street Journal.

Uh-huh, uh-huh. The ol’ dying, slow-growing, disappearing, indispensable industry conundrum. Now that is a take on this rally I can get behind.

UPDATE: This Zero Hedge post should have been in here somewhere. Now it is.

Two days of essentially zero trading here. Watching the charts pretty carefully, however, especially the S&P via $SPY, which I would call the best current tell for strength and weakness, despite small caps leading rally performance and the NASDAQ  (I watch it via $QQQQ, a.k.a. “the Qs” if you’re in training) having the best performance YTD.  Between the swine flu freakout and last night’s stress test “leak” (which inspired a pre-market drop and then a steep buying frenzy), I’m beginning to wonder whether my whole look-for-the-news-tide shift will even happen here. The market has had two strong mornings followed by two weak afternoons, and news good or bad doesn’t seem to matter one bit. Prices might just have to keep weakening before news starts to look bad.

Without further ado, the analyses:

  • Tickerville’s tape talk is up for the day. He’s watching $SPY closely too. Spoiler: he’s still pretty bullish, though doing “a lot of hand-sitting”. ~17 minutes.
  • Trader Mike, I heart you
  • Jack McHugh gets his commentary in a little early tonight, always a must-read with the news links you need right thar at the bottom all handy, that this time makes the round-up.
  • Also, a new analysis candidate, chartless and concise (which characteristic always makes Mr. U go “Nice!” in his Borat voice) from the newish Market Talk blog.

Couple other things I think are worth a look, but caveato lectorio: these are newsish, not honest tape. In the when-will-they-learn category:

Goldman Sachs Boosts Risk-Taking at Fastest Pace on Wall Street

Wall Street Pay Bounces Back

And in the oh-no-what-do-I-do-with-this category:

The Next Great Bubble? (China–great analysis)

The Fed: Our Next Troubled Bank? (Now with new & improved 48-1 leverage! also via Ritholtz)

Be careful out there.

Having sold several unborn grandchildren into slavery to pay off a few of this week”s failed shorts, I am further obliged to eat this blog’s words on last week’s tidal-shift-in-the-news-reaction call. (As someone who subscribes to such arcane notions as “truth” and “fact”, I feel it is important to distinguish “right” from “wrong”. Nutty!) Not only am I wrong; if the rally presses on–and it certainly looked on Thursday and Friday like it wanted to–I stand to lose more money. The height of trading disgrace! Damn you, Mr. Unexpectedly, when are you going to learn to take small losses?

While losing money (and grandchildren) can make a guy pouty and petulant, I hope I don’t sound like too much of a sore loser if I say that trader wisdom as a justification of this increasingly irrational optimism we call a rally (or, indeed, any wise saw used to make any trending market movement seem like incontrovertible fact) makes me wanna bite people and throw things at the same time. (Rest assured, fictitious reader, before too long you will hear me winning and complaining, too. Such is one’s fate when one is a small-town tycoon/crank played by Lionel Barrymore.)

The nugget

But I digress; back to today’s target bit o’ wisdom. My great trading error of late, if you’ll pardon my frangolese, is understanding just how royally the global economy is still fucked, and refusing to accept the market’s rejection of said fuckédness. Instead, said wisdom chirps, I should just “trust the tape,” because “the tape never lies.”

Rot and poppycock!

While anyone is entitled to a little linguistic imprecision on the best of days, this bromide is particularly ill-constructed. Its faux-zen chin-stroking tone is especially grating–it smacks of Hollywood bonsai-trimming sessions with Mr. Miyagi more than anything any ancient philosopher would have wasted time pondering. Its use is misleading, inaccurate, and casuistic, cited as proof of free-market capitalism’s irrefutable honesty, but only by people who already believe the free market is honest. It holds about as much truth as a brand name for a pharmaceutical product or a complex derivative.  Let’s dismantle it together, shall we?

2009: Year of the Truth

If the tape never lies, obviously, it always tells the truth. Interesting–let’s take a quick look at 2009’s tape via the indices. What does it “say” about its underlying components, i.e. the value of major American capitalized industry? Until early February, it says, things were mildly weak or slightly improving. Then, suddenly, things got very, very bad. (Tuesday, February 10, 11 a.m.: Geithner spoke. Apocalypse!) Then, just as suddenly, everything got really, really great again!

Yeah. All “true”. Perhaps it’s just a problem of time frame then? Or maybe it’s because I’m looking at indices? Certainly, if we look at an observable event, something you can isolate in time, we can watch the tape spew some oracular genius. OK! Let’s’ look at Capital One Financial this past week. A major event should provide something measurable: on Wednesday after the close, $COF announced earnings. A horrible quarter, results that indicate both the state of the economy and the state of the business. After a strong after-hours drop, the all-knowing tape spent the next two days adding 25% to its common share value, for a 15.4% gain on the week. Capital One Financial is in a bad way, and likely to worsen, which adds up to every one of its dollars now being worth a buck fi’teen? Um, obviously, no. I could see that being the case for, say, the results of $AAPL earnings, their best Q2 ever in a miserable economy. Now that is a strong company, in fact. Aaand the guru tape says… yeah, ok, here’s 1% for your banner week.

He-tape said, she-tape said

Poppycock, say you? I could go on launching anecdotal torpedoes; you could remonstrate, reading it differently; there are a zillion factors I’m not mentioning; we could argue for days. This back-and-forth, when translated from words to buys and sells, is the tape. The tape doesn’t “say” anything at all. It’s just a record of what quants, prop desks, and traders of all stripes think tick by tick, and it doesn’t take a genius to see that no matter what your time frame, it is a record of conflicting opinion as often as it is of consensus. It’s the inverse of that other (equally annoying) cliche about stopped clocks: If the tape reliably “tells the truth” in any one moment, then logically speaking it’s lying the next time it moves. And its honesty is immaterial; no one gives up and goes home if we hit the value on the head, because trading is speculating, and doesn’t give a quarter of a damn about the truth. If the tape pronounced a security’s price incontrovertibly, froze a company’s value in the glare of absolute knowledge, there would be no more buying or selling, because the discovery would have ended, until the company evolved and its value changed. Traders would just walk away–no more action. No edge.

The point here is not to crank out weak semantic wit. It’s to get to the heart of the matter: what we talk about when we talk about tape not lying. Price movement is an expression of conviction, or rather the net of a bunch of conflicting convictions, about value and its likely reflection. I buy $COF at 15 because I believe (whatever the source, it’s just a belief, not a “fact” or a “truth”) it is worth more, or at least other people are likely to think so soon; you sell it short because you believe it is worth less. From the moment we place our bets, the tape appears to reveal the truth like a called poker player turning over cards, making one of us right and one of us wrong, and thereafter, indisputably, one of us is a tape-fighter and the other a genius.

All brought to you courtesy of the booster-rocket refraction of hindsight. When a stock jumps 25% in 13 hours of trading, it may look like the tape was sitting on a mighty strong truth, but it’s really just a sudden consensus feeding on itself, the movement causing more and more $COF traders to reach the same conclusion: Whether short or long, they both needed another share. The ordinary cacophony of opinions suddenly resolves itself into a clear picture of fear (here, the shorts) and its common-law spouse greed (the longs), and tape “truth” is “born”.

The flop

The poker-player comparison is useful for another reason: even if the tape did speak, it couldn’t possibly tell the truth about value, because value doesn’t exist, except as constantly shifting assumptions. I used to think that poker was a lot riskier than trading, because there are so many unknowns, and chance is certainly in play. But at least at the end of a hand, there is order: Cards are turned over, an uncontested winner and loser discovered. The only possible truth for a publicly traded company, as Zero Hedge‘s fabulous tagline reminds us, is bankruptcy and liquidation, the clock stopping for good. Though the tape may anticipate a market death, and will certainly have a lot to “say” about it however late to the party, the one incontestable statement of value takes place in court, not in the market.

So when the twitter stream pops out the old warhorse, I may remonstrate, but the more productive thing to do is to translate its meaningless message into plain old common sense:

Chaos and conviction, fear and greed, have nothing to do with the truth, but everything to do with often-repeated patterns of human behavior.

(Not as zippy, is it? Kinda like, say, actual trading itself–more karate, less kid.)

Struggle against these patterns–order the chaos, fight the consensus, get greedy amidst the fear or fearful amidst the greed–at your account balance’s peril.

To which I have but one more thing to add: we trust this rally tape at our economy’s peril.

Today’s outlier earnings reactions aside ($COF anyone?), I’d say that the failure over the last two days to push higher in the indices is another confirmation of the news tide shifting and the March rally’s petering out. Today looked like pitched battle in the charts, and also over on Stocktwits, where I kept the open stream up for much of the day (a habit I’ve been quitting as signal drops and noise rises), trying to measure a little trader sentiment. The number of times I saw back-to-back tweets of absolute conviction that it was time to buy the financials or time to sell them was a whipsaw of its own.

Earnings news is all over the map, of course, and the market’s volatile intraday moves are confirming this: analyst expectations plus beats and misses plus guidance plus one-time items and two-timing accounting plus recent price and volume action is a lot of vectors, and as the big players report and players large and small react, we get a choppy trader’s market, and the bulls and the bears get louder without being any more correct. Today’s 3:30 selloff was as hot and heavy as yesterday’s buy into the close.

Chris Nelder has a nice post up today in honor of earth day. He’s encouraged by all the new renewable energy projects underway here in the U.S. (as am I), but his focus then turns to the rally and the lockstep chart patterns of different sectors.  His reminder that financials are the real drivers of market action is timely too, and the real tell that this fat rally is not the rally. The financial sector is leading America and the world out of economic torpor? Uh, no. But day after day, it leads the market up, down, and all around.

Infrastructure and real estate would be important tells in a new bull market, of course, but the leading indicator of real building strength would be–or rather, will be, at some unspecified future date–technology. Innovation in tech is, hands down, America’s greatest manufacturing capacity these days. While tech stocks have of course been strong the last few weeks too (what hasn’t?), on any given day they continue to spank or tank with the banks, as if the two industries shared the same valuation. Total nonsense.

Were this a real bull market start, tech would stay strong in a selloff like we saw late this afternoon, and not just relatively strong. STRONG, like the industry actually is, even in recession. Sure, businesses and consumers are cutting back, but IT is buried deep in every business infrastructure and many lives now, with the internetz cranking away and kiddies young and old hitting the video-game crackpipe and smartphone telecom morphing from the new cool to the next must-have. That is demonstrable, logical strength–trend–that should shrug off confused price discovery if salad days were ahead.

The current profitability of Google or Apple or Research in Motion, considering the breadth of this recession, is very impressive (never mind Wall Street’s senseless expectations of endless growth and eternal youth), but these stocks have rallied off 2009 lows a lot less in percentage terms than, say, Citigroup, and remain well off their 52-week highs. If the bull market were back, the opposite would be true: tech would be so strong that crummy broken financial companies barely necessary to their doing business (no debt, huge cash) were dragged along for the ride.

Put simply, financials are the wrong leading index, but they’re our leading index at the moment. While they have surged off severely distressed lows and pushed the markets up, the state of finance here and abroad continues to make sustainable market growth impossible. The bulls may not want to see this (that’s a Hussman link, a must-read), but a few months’ earnings as tweaked by a press release notwithstanding, we remain one or two nasty news stories away from this fraudulent, grabby, and broken sector’s dragging our undervalued technological prowess–and the rest of the market–down all over again.

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