I have absolutely no idea how to judge the validity of this email, but I thought it was interesting. From a reader:
JG- I’ve traded for a living for about 15 years and this is my take on things. First of all, as a backdrop, it’s worth noting that for the last 30-40 years there’s been a clock-work-like tendency for the market to decline substantially (meaning anywhere from 10-25%) into an early-Q4 low every 4 years. It’s occured without fail except in 1986 when the 4-yr cycle low was pushed out a year into 1987 (and that was obviously a doozy). Anyone and everyone even tangentially connected to the industry (including the WH, etc. I’m sure, particularly w/ an ex-GS bigwig at Treasury) knows about this phenomenon and had been expecting it all year. But this year was different. We topped in early-May and came down about 8% into a mid-June low on the S&P-500 (which is the index that matters, not the Dow Jones Industrials). We then bounced around for several weeks into August and as the media was beating the drums about the ‘two worst months of the year (Sept and Oct) and the aforementioned cycle low forthcoming, we took off bigtime as Septemeber got rolling and all the Big Boyz were back from vacation. The question is why? Why was this year an abberation vs every other fourth year the last few decades except one? And what does it mean going forward ? My guess is this. The powers-that-be carved out an early low this past Summer to get the selling that’d otherwise have occured the last couple months out of the way. Then, once Sept got rolling and all the hedge fund guys and gals (that’s $1 trillion plus these days) saw that they were caught (short) on the wrong side of the market, the rout was on. And they’ve been chasing the market up ever since for the last few weeks coevring their asses on short positions and frantically trying to increase long positions to avoid losing more relative performance ground to the market averages and ultimately, losing their jobs. [Name withheld]
P.S.- Btw, when I say the ‘powers-that-be’ I mean the folks responsible for the fact that 40-60% of total daily volume these days is ‘program trading’ volume. That’s the algorithum-based, computer generated trading done by the 8-10 largest brokerages (led by GS) for their own accounts used to create profits through quasi-manipulation of the futures markets. In short, the market doesn’t just move, it’s ‘moved’.
Update: Another of my Wall Street Guys responds:
Jonah,
That reader note sounds like mostly nonsense to me. Any email that talks about “the powers that be” or treats “those hedge fund guys” like a single investor class with a single perspective, is just talking nonsense. The algorithmic trading he’s talking about is trading done in systems designed to get people executed at the VWAP (Volume weighted average price) for the day. It’s just a way for discretionary money managers to get large positions executed without taking on a bunch of intra day execution risk. I use it occasionally myself for some products.
This kind of paranoia of the big players is a common thing with the guys who are moderately successful but can’t seem to make it into the real “big time”. All of their constraints are a product of their lack of funding so they think that the “big boys” or the “powers that be” wouldn’t be penned in by them. In truth, they aren’t. I have access to all the capital I could ever need if I could just convince my boss to get it for me, but that doesn’t mean I have no constraints. In fact I have much stricter constraints on my risk management than that reader will ever have, and at the level we deal in, liquidity becomes a serious constraint as well. If I “move markets” it’s because I’ve done something wrong, and the only person who pays for it is me. As for the “sell side” firms, they are an even worse position than I am because their natural position is to be “short volatility”. that means when anything happens anywhere in the world, it’s probably going to be happening to them.
I would put to much faith in his assessment.