— The glories of high-frequency trading were on full display last Thursday as the S&P 500 turned a 1% gain into 1.2% loss for the day

— It was all about the noise … the potential for a good jobs number being bad news for the prospects of a rate cut.

— Last Friday’s rebound may signify a change in the market’s perception about the course of Fed policy … letting good news be good news.

The Glories of the Algo

According to many sources (“Wall Street gone wild”) high frequency, algorithmic trading accounts for as much as 70% of the volume in stocks traded on U.S. exchange. This is a primitive application of artificial inteligence. Essentially a human being is programming a computer to be on the lookout for certain types of key words or headlines that the programmer believes may move markets. Today most of these computers are scanning for good economic news, which from a contrarian point of view, is bad news for stocks. Why? Good economic news means long-awaited Fed rate cuts will be less likely to happen in a robust economy where inflation, albeit much improved, is still a concern. The corollary is that they are also scanning for really bad news, like a big jump in unemployment. The computers would be buyers on a bad statistic because that economic weakness would hasten Fed rate cuts.

Noise

Photo by Elyas Pasban

Essentially this is all noise, having little to do with the strength or weakness of the economy and investing. The downside is that the volatility that these trading schemes create promotes fear and distrust in the market, so much so that there is $2.7 trillion tied up in the cyber-currency market, vehicles that earn nothing and pay nothing.

“AI stocks are highly valued, with chip maker Nvidia having a trailing price/earnings ratio of 75. But at least Nvidia produces a real product and has real earnings. The nature of the cryptocurrency market seems to embody the “greater fool” strategy of buying something with no intrinsic value simply because its price is rising, while hoping someone else will later purchase it from you at a higher price. Bitcoin (BTCUSD 0.74%) isn’t a cash-flow-producing business or interest-paying security but code—an ethereal abstraction written on the virtual wind.” (Barron’s–You need WSJ or Barron’s subscription to access)

A change may be in the wind

Photo by Nick Fawings

Focusing our attention on Friday’s market, the report of a huge beat on the jobs numbers was very interesting. Those  who estimate these statistics were expecting March jobs growing by 200,000 and were blown away by a 303,000 print. This should have sent the market lower. Instead the S&P 500 rallied 1.11%, closing up 57.13. On top of this you had a Federal Reserve Governor Michelle Bowman positing that the Fed might raise rates further if inflation does come down. 

None of this seemed to phase the market rebound, signaling to me the the narrative fueling the market might be changing. Is it possible rates are at a proper level vis a vis the growth and inflationary prospects for the economy? Is good news finally going to be taken as good news? Considering how well the market has been performing this year, a series of all-time highs on the Dow and S&P 500, I still sense no euphoria. The continuing lack of interest and avoidance of the economically sensitive Russell 2000 would point to a lot of skepticism. That index is still 16% away from the all-time high it made in November of 2021.

There are many voices and narratives around that totally disagree with the concept that the economy is in good shape. In fact, I’ve heard many espousing the idea that the economy is in terrible shape. I just have to go with the data and facts that I’m presented with. Yes, there are still many suffering in our economy. I get it. In the aggregate I see many doing better even after the inflationary spurt we have experienced post pandemic. I see the employment stats as very positive. Wages are growing. There are still jobs going begging. Restaurants are full and people are spending. The market in new all-time high territory is signaling that my perceptions are correct. This is not a conclusion I’ve just come upon. My positivity is and has been around for a long time. You,re welcome to check out my past kortsession.com posts. 11 years worth are contained in the attached archive.

Finally, at the risk of making a prediction, which I have always concluded is a very dangerous game, I will make a prediction about the course of the market this week. We have the consumer price index (CPI) numbers for March along with the minutes of the last Fed meeting coming on Wednesday. My prediction is that the market will weaken into these events unless, as I suspect, the game has changed (i.e. good news is good news) or someone has foreknowledge of a better-than-expected CPI report or we get dovish dovish comments in the minutes. Even if the numbers on CPI inflation and the Fed minutes signal higher rates for longer, the market will rebound after the releases. I believe that the market is over worrying about these issues because we have lived with higher rates for over a year without the oft-predicted dire economic consequences.

Now it is time to tell me what you think. 

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