Friday, March 12, 2010

Some Very Strange Things are Happening Under the Surface

I am noticing some very strange things happening, and I simply have to think the algorithms don't care about individual stocks that much anymore, and are simply making sector bets.  If you've been following the markets closely, you will know the financial sector has been on fire of late. 

In a world where 40-60% of volume each day are just computers rapid fire churning, and making sector allocations based on whatever the PhDs have programmed it seems we have reached a point where individual news has become somewhat irrelevent.  2 examples using the financial sector:

Early this week I saw a large shareholder of Assured Guaranty (AGO) was going to drop 16.4M shares onto the market in a secondary offering.  Not the type of secondary where AGO receives any money, just a large scale sale.  What this means is these are shares that were once in strong hands (almost like not being part of the float) but now are going into the open market.  That should of led to a good sized drop in the stock.... instead the stock surged.  You can see the volume explosion as those shares were pushed into new hands.  How was all this inventory absorbed with not only no damage to the stock but a surge??  AGO was not a stock in an uptrend , it was looking horrible on the technicals yet somehow it jumped OVER resistance as a huge slew of shares were barfed up? 

Yesterday as I was looking for new buys - and since financials were so hot I was scanning some of our old holdings; I noticed Discover Financial (DFS) was beginning to break out.  I almost bought it, but decided to wait as earnings were coming out next week.  Then last night, there was a bad pre-announcement - rather than make 9 cents as the analysts had estimated DFS said they would have a substantial loss.
  • The credit-card company expects a first-quarter loss of 22 cents per share to 23 cents per share. Analysts polled by Thomson Reuters expected earnings of 9 cents per share.
That's a huge miss and would normally crush a stock.  I wiped my brow as I saw the stock down about 5% in after hours (apparently HAL9000 does not work after 4:30 PM), and said "glad I did not jump in - shocked it is only down 5%".  This morning?  The stock is acting as if there was no news at all last night, and the after hours action was just a dream sequence from Dallas.  Huh?  Are minor things like earnings data not relevant anymore when masses of quant funds are making a sector bet?

I've been saying the past few years, the nature of these markets have been changed forever by these algorithms [Dec 3, 2009: Geeks Trump Alpha Males as High Frequency Trading Takes Over] and the new dominance of sector ETFs as trading vehicles, but even I am surprised and frankly boggled by some of the things I see now.  We are in some sort of new Twilight Zone market.

No positions

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