Friday, October 21, 2011

Stocks Rebounding? Don't Believe it for a SECOND!

It is natural in times of acute financial distress for beleaugered people to try to seize any remote "life raft' or hint of economic optimism. This is true even if the raft or note of optimism is baseless. The fact is, people are hurting, and more than 14 million remain unemployed, which the Dept. of Labor pegs at roughly 4.6 workers for every job. Meanwhile, another 22 million remain under-employed in an under-performing, low aggregate demand economy.

Then there are those who have jobs, as well as 401ks, and are trying to save for retirement. Or perhaps a more accurate phrasing is "re-save" after losses in the 2008 meltdown! But according to a new Government Accounting Office report - many of these may never make up what they've already lost via mutual funds tanking and their component stocks taking on the guise of stinkers. These people, who often have to help pay their parents' nursing home bills as well as their kids' college tuition, are especially vulnerable to the come-on that the "Stock Market is Rebounding" or "The Rally HAS LEGS!" as recently announced (WSJ, Oct. 11, p. C1).

This was after the Dow Jones Industrial Average (DJIA) shot up 330.06 pts. or 3% to 11433.18 in one day (the biggest single day's surge in two months). But if the determined person read through the piece more carefully, not just scanning the main page and headlines, he'd behold (p. C5):

"One sign Monday's rally lacked strength: Volume was particularly low as holidays were neing observed in the U.S., Canada and Japan. Some 3.9 billion shares changed hands, below the 4.4 billion shares daily average this year"

In other words, fewer people were reaping the rewards, if any. (Bear in mind as well, that the average small fry investor - especially in the era of flash or high frequency trading - will only gain on redemptions on about 2 days of 365. This means that if he isn't hitting on all cylinders those particular days, which also assumes he correctly elects to redeem on those days, he'll likely take losses.

One critic actually saw this temporary rally for what it was, a "relief rally" (p. C5). The same critic warned that until the fundamental issues were resolved the rallies being seen would most likely be spurious, and not sustainable.

He's correct, and as I mentioned often before, this almost daily obsession with the DJIA and pure numbers is causing too many average Americans (who still have 401ks with mutual funds) to obsess over numbers to the exclusion of the market fundamentals, which simply don't exist. Indeed, we are approaching another bubble environment as the money gets cheaper because of too many Fed interventions (they're actually considering yet another round of "quantitative easing" to purchase more toxic securities from banks) and continued low interest rates.

Add to that the headline from 3 days ago: 'Traders Warn of Market Cracks, Oct. 18, WSJ, p. A1). The piece noted the extreme worries by many professional investors that "cracks are appearing deep in the workings of the stock market" and these cracks are "making the market treacherous" to invest or trade. If these professional investors are fretting, shouldn't the small fry little guys who own 401ks be too?

What are these "cracks"? Evidently the mutual fund managers are saying (ibid.) it's becoming increasingly difficult to make even the most basic transaction or trade without generating a huge price swing. This itself suggests the increasing interference and control of high frequency traders who can buy and sell back millions of shares in minutes, dwarfing the volumes an ordinary investor can move. It also means the HFT cadre can make more profits and redemptions per unit time.

The other problem is "lack of liqujidity" - or the ease of getting a trade done at an acceptable price. But again, this defect would tend to manifest if HFT'ers are rapidly bidding up prices during any trading interval.

The more ordinary folks are aware of the current market instability and why it exists the less likely they will fall victims to the next crash, especially when the current bubble truly bursts.

No comments: