In July, the volume on the SPY was about 40% lower than it was in May. When I’ve told people this statistic, I’ve been given responses such as “Well, it’s summertime,” the market’s not moving “ (which is not true considering it was the best July in many years for many market averages) to “No way. Most people have been working every day.” I did a little digging to check all of this out. In 2009, the volume on the SPY was 17% lower than it was in May following the huge volumes in 2008 leading to the market bottom in 2009. In 2008, the average SPY volume was up 88.5% over the average SPY volume in May. Want more? In 2007, the July SPY volume was 71.9% heavier in July than May. In 2006, July SPY volume was 4.1% higher than that of May 2006. In 2005, July SPY volume was 5.9% higher than that of May 2005. I can bore all of you with stats as I went back all the way back to 2000 when the SPY truly became an integral instrument to trading; nothing begins to compare to the drop-off from May to July of this year. So, what happened? The flash crash played a role for sure as some people lost confidence. It has indeed been a very hot summer in many parts of the country. It’s also true that in recent months, volume tended to move inversely to the direction of stock prices. And certainly in my office and at Epiphany, the number of overall traders is going up- not down. But 40%? A 40% drop-off in volume has to be caused by something else. And while it’s an opinion- it is an opinion with some facts to back it up that the overall decline in volume is due largely to the increased pace of high frequently trading as well as the switchover from EDGX to a stock exchange. According to studies such as one done by researchers at the prestigious Bouchet Franklin Institute, traded values as well as trading volumes are starting to show more and more correlation at increasingly shorter timescales. As noted Tuesday for instance, moves in markets such as the currency markets now take place in compressed time horizons. Thus, the “self-similar” fractal patterns tend to result in volatility surges, and feedback loops (i.e. something can be ahead 4 ½ points, but move such as that it is up 1, up 1.02, up 97 cents, up 1, up 1.04, up 1.02, up 1.05, up 1.01, up 1.03, up 1.00, up 1.13, up 1.09, up 1.07, up 1.14, up 1.12, and so forth all the way up to the 4 ½ point gain). Basically, such esoteric concepts as the Hurst Exponent (which is a measure of ‘noise’ in stocks) and the Markov Process (which measures randomness of things) put the whole premise of an efficient market in the immediate-term into question which simply makes one conclude that high frequency trading has had a major impact on trading. Again, I keep taking the amoral ground here- it’s not for me to say what it is right or fair or anything of the sort because, frankly, that’s over my head. But where all of this leads is that it makes traders that much more unsure of moves which were once present in different times, the algorithms tend to automatically do the trades, and there is less human participation in total trading volumes overall as humanoids cut down on their trade size. This is not a wah-wah “cry me a river” piece. Markets change. They will always change. Circumstances and dynamics change. It's up to traders to adapt. But to those who say that execution quality, trade volatility, and ephemeral market impact are improved by high frequency trading and the changing of EDGX to a stock exchange, I simply note that as trading volumes continue to plunge, it is very difficult to claim that anything is more efficient. Sure, one can get price improvement at times, but particularly in the immediate-term, many times one does not know if one wants the improvement nor can he/she get the size of desired purchase as was available six months much less six weeks ago. For day traders, obviously all of this directly impacts us as has been showing by gradual declines in volumes by most traders in the last few weeks. I will continue this series for awhile in showing the impact of what happened two weeks ago with the switchover as well as some things I am beginning to actively do in adapting shortly, but I am trying to educate myself (and hopefully a few others) first about what has happened and its effects else how can I or anyone who is a non-high frequency day trader come up with alternative solutions to the new challenge at hand?
Markets in Asia were generally quiet overnight with Hong Kong ostensibly flat although Tokyo had a nice bounce in closing up 1.7%. In Europe, Paris and Frankfurt are up 0.5% with London up 0.2%. Oil is down slightly, gold up slightly, and bonds and currencies are quiet. Futures are slightly weaker after poor jobless claims data. For today, look for a relatively quiet day with a slight downside bias as stocks go into a holding pattern particularly as the day progresses ahead of the unemployment report. Focus on the relative strength plays, the earnings plays, and the drillers on RIG’s numbers and positive BP news.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
RIG- decent earnings
SINA- decent earnings
PRU- decent earnings
NWS- decent earnings
SOLR- great earnings
MIPS- decent earnings
ATML- decent earnings
ALL- decent earnings
RGS- seeking strategic alternatives
AGN- featured on ‘Mad Money” last night
INT- closed near a high after announcing earnings
AGU- closed near a high after announcing earnings
AREX- closed near a high after announcing earnings
OEH- closed near a high after announcing earnings
OPEN- closed near a high after announcing earnings
DNDN- closed near a high after announcing earnings
WWWW- closed near a high after announcing earnings
PWRD- closed near a high after announcing earnings
POT- closed near a high
FSLR- closed near a high on takeover rumors
CLF- closed near a high
THRX- closed near a high
DO, APC, ATPG- closed near a high
CI- decent earnings
MED- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
HIG- poor earnings
IPI- poor earnings
MELI- poor earnings
CNW- poor earnings
SNIC- poor earnings
GCA- poor earnings
MOH- decent earnings, but announced share offering
UVV- closed near a low after announcing earnings Tuesday…oddly, it broke yesterday
WFMI- closed near a low after announcing earnings
PBI- closed near a low after announcing earnings
STEC- closed near a low after announcing earnings
LOCM- closed near a low after announcing earnings
LEAP- closed near a low after announcing earnings
FWLT- poor earnings
ARO- poor earnings guidance
Earnings:
THURS AUG 5 BEFORE
BVF BZH CAH
CBOE CI CTB
CVC DSX DTV
FIG FWLT H
HOC JOE LAMR
MED OCR OMG
PCS TDW THS
WPI
THURS AUG 5 AFTER
ATVI CF CROX
ELX EOG HANS
KFT MCHP MHK
MRX PSA SGMS
VCLK
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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