Alex Filonov Blog | Market Is Down. Now What? | Talkmarkets
Principal Performance Engineer

I was born in USSR. After graduation from college worked full-time as an IT specialist. Moved to US in 1996 and started investing in 1998. I had an extremely successful 1998 and 1999, very bad 2000 and 2001, then recovered. I mostly invest in what I know, which means mostly high tech ... more

Market Is Down. Now What?

Date: Saturday, January 23, 2016 10:21 PM EDT

Correct answer is "I don't know". Of course. I thought that Wednesday intra-day drop of more than 500 Dow points is a capitulation. Maybe even THE capitulation. Which signifies the end of bear market and a start of a new bull one. But there is one interesting fact which goes against it. Bottom on that day happened exactly at 2:30 ET. That was the time of Feb WTI futures expiration. Oil futures roll over usually doesn't create huge drop at expiration, although some analysts claim that's what happened. It looks like some huge dump of contracts in which buyer had to take delivery, but didn't want to. It also appears that a lot of trading algorithms are currently trained to trade stock ETFs in line with oil. It shouldn't be this way, but if high frequency guys use neural networks algos, that's how such networks would react, according to the last several months of trading. Unfortunately, HFT is the majority of trading now. Not complaining, just clarifying the reality in which we trade.

OK, so what is the current situation? China is in a big trouble. Widely advertised turn to consumer economics isn't happening. At the same time, workforce in the country is not the cheapest in the world anymore, banking system is still doesn't really exist, and nobody believes government statistics. Some analysts wonder why volatility of Chinese market affects much bigger US one. The answer is simple: hedge funds invested in China are getting margin calls and selling whatever they can. Plus HFT algos are doing their thing, magnifying the effect.

Next elephant in the room: sovereign wealth funds of oil producing countries. These funds are huge net sellers of everything they own in the last 6 months. They have to, budgets of these countries need money now. Of course, this selling is also magnified by algos.

Last, but not least, is a bunch of idiot fund managers invested in commodities (especially oil futures). They are losing money hand over fist, need to sell something to avoid margin calls, so they sell stocks and bonds.

Market direction will be defined by money balance, as usual. On one side above mentioned sellers. On the other side multiple funds investing money long term, not bothering with trading. In the long term, bulls always win. The main question: when sellers are going to be exausted?
Interesting trivia. I watched Rose Bowl Parade this year and was surprised how many bears were on the floats. Never seen that many.

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