The booking of FANG profits is very apparent in the last five trading days as the Nasdaq has lost 1.7% in value.
So what happen at around noon on Thursday that caused the Nasdaq to fall 140 points in the next hour?
I would venture that a box with a smile was turned upside down in a number of large, in-the-know trading firms, but more of that in a second.
The VIX shot up to over 11, which it has not hit for the last three months and the charts show that liquidity dried up very quickly. The FAANG stocks took the brunt of the hit, which makes some sense since they are widely held and have been on a tear.
The move was quick and abrupt, which indicates to me the black box algo trading platforms started the selling and then it intensified through the echo chamber to spur more selling. Not out of the question on light trading day in late July.
What does give pause, however, is the liquidity or lack thereof, on the downside. As the algos and tech-focuses ETF were selling, the chart shows little action to stem the selling on the way down.
While this was little more than a blip on the screen, it could foreshadow a more dire and desperate move perhaps in August when most trading desks are operating on autopilot until Labor.
That said I would not want to suggest that major market participants had an inkling that Amazon was going to tank after reporting a huge miss on the bottom line after the bell.
However, if you look at Amazon’s trading over the day, then a strong case could be made that it led to the Nasdaq sell off.
As the first quarter ends Friday we see that while sentiment has exploded, economic growth is muted.
On Thursday the feds released the third revision (not the final revision since it will be changed again and again) of GDP for the final quarter of 2016 and the year.
The latest revision of Q4 showed growth of 2.1%, which was two bps higher than the 1.9% in the former reading released last month. But for all of 2016 the US GDP growth was only 1.6%, which demonstrates the lackluster growth over the eight years of the Obama administration.
The Obama administration is the first modern presidency since President Hoover not to have a 3% annual GDP growth during its terms.
Fast forward to today, we will not get the first reading of Q1 2017 until next month, but let’s look at the equity markets. The Dow Jones industrial average is up nearly 5% for the year, while the broader S&P 500 is up 5.8% and the Nasdaq is soared 9.9% doubling the Dow.
By comparison the Nasdaq was only up 1.3% for Q4 2016, the S&P 500 grew 3.2% and the Dow rose 8% over the same period.
So the question to be answered is, which is driving the economic bus, consumer sentiment at a 10-year high leading to equity prices soaring? Or are higher stock prices driving sentiment?
Yesterday we spoke of traders window-dressing their returns at year’s end to make clients portfolios look better.
Monday’s trading was not that, it was the black-box algos trading up to set new all-time high records on the Dow Jones industrials, the broader S&P 500 and the tech-laden Nasdaq.
The President-elect’s honeymoon is being extended as he rages on so do the machines.
Donald Trump’s war on the media, which gave him little chance of winning throughout the campaign, is the perfect illustration of “Things will change around here.”
And while traders don’t like change, the algos love it, thrive on it to make incremental bets a million times an hour to eke out profits.
On March 9, 2009, the Dow Jones was at 6,547.05. Today we may see Dow 19K hats on the trading floor.
Now as I have written many, many times, most of those gains came at the expense of Americans not in the stock market — in the form of zero interest rates.
The savings interest you would have received on your bank accounts, instead went to Wall Street in the form of cheap loans from Fed chief Janet Yellen to bolster profits in the ailing banking system.
It’s the ultimate zero-sum game. Main St. got zero, Wall St. got some.
And many middle class Americans lost that game, with some of them not even counted anymore as middle class because of lost jobs, homes and opportunities. But here we are.
So when a major exchange crosses a milestone number like 19K on the Dow, it’s headline news. And good fodder for the conversation around the Thanksgiving table.
But remember the Dow, S&P 500 or the Nasdaq are not the economy and in this cycle are almost contrarian bets to the health of the US.
Janet Yellen in her press conference Wednesday said that the US GDP for next year and 2018 will be lower than previously expected, yet all is well according to the Fed chief.
The Fed governors projections for economic growth (dot plot) was knocked back to below 2% for 2017 and 2018. Remember that the Fed’s projections never come in lower than reality. For the last 8 years the Fed’s projections have always been rosier that the actual growth, so the projections for 2017-2018 may mean that the next two years will be worse than the last two years.
However if you listened to Yellen, she spoke about a growing economy based on job growth. It was very strange how the data disconnected with her comments.
So the narrative coming out of the meeting is that there will be a rate rise in December. But how can you raise rates if growth is nearing stall speed and we could be in a recession in 2017 given the Fed’s rosier than real projections?
But none of that matters as the Nasdaq hit an all-time high while Yellen spoke and bonds sold off as markets figured that a low Fed Funds Rate will be with us for the foreseeable future.