Posted |
A Worrisome Sign or Simply Computer Folly? image

There are times when "why" the market does what it does may be more important than "what" it actually does. Cutting to the chase, Tuesday's wild intraday action may be a perfect example of this phenomenon as neither the final tallies on the indices nor the intraday chart action itself told the entire story. And the bottom line is that if one understood why things went down the way they did, they may not look at the outcome the same.

Just Another Day At The Office, Right?

To the casual observer, Tuesday was probably seen as just another up day for the stock market. The S&P 500 finished with its fourth consecutive new all-time high and was once again accompanied in that rarefied air by the NASDAQ, Russell 2000 and S&P 400 Midcap indices. And while the DJIA did finish with a gain of 75 points, the venerable index once again lagged behind its broad market counterparts. In sum, Tuesday's results looked pretty much like the past several days had.

However, if one simply looked at the closing results for the market indices, they would have missed a large part, if not all of the story.

It Wasn't About the Jobs Report

Coming into Tuesday's session, most everyone in the game was on pins and needles waiting for the September jobs report. This all-important data, which had been delayed by the government shutdown, was viewed as the key to both the state of the economy prior to the shutdown and the Fed's next move.

So, when the Nonfarm Payroll report came in weaker than expected, traders immediately hit the buy button because it meant that the Fed wasn't likely to start cutting back on their QE stimulus programs any time soon. Although the unemployment rate actually fell a tenth to 7.2% in September, many analysts now don't expect the Fed to start "tapering" QE until sometime in the spring.

While the logic of weak data being good for stocks sounds a tad counterintuitive, don't forget that the big banks and hedge funds play all kinds of games such as the "dollar-carry trade." So, anything that keeps the dollar down (the dollar was hitting fresh lows for the year after the release of the jobs report) is actually good for stocks.

It Was About the Mo-Mo Stocks

But a funny thing happened on the way to the Fed-driven celebration yesterday. Just before 10:30 am Eastern Time, stocks were hit with a sell program. And then at 10:39, stocks were hit VERY hard, VERY quickly as the S&P 500 fell ten points in a matter of minutes.

While the decline definitely wasn't of the Flash Crash variety, the move was VERY odd and VERY suspicious. Suddenly and without warning, a strong market had turned on a dime. In short, this is the type of move that is generally associated with news.

Analysts watching the most active lists and the "hot dot" stocks were quick to point out that some of the high flyers such as Facebook (FB), Amazon.com (AMZN), Tesla (TSLA) and Netflix (NFLX) - especially Netflix - were getting crushed. This was odd because NFLX had soared after the company had reported earnings on Monday afternoon and had opened 9.2 percent to the upside!

But by 10:40 am, the big gains in Netflix were gone and the stock was down more than $20. The bears pointed out that this action represented a classic case of the momentum leaders reversing after strong runs - and it did NOT bode well for the overall market. Quickly, the bears smelled blood.

Ichan'd!

But... As was alluded to earlier, there's more to the story. It turns out that "somebody big" was selling a large slug of Netflix. As was discovered later in the day, that "somebody big" was none other than billionaire activist (and big-time "book talker") Carl Ichan. According to reports, Mr. Ichan was selling half of his stake - or 2.99 million shares - in NFLX.

This type of news spread like wildfire on Wall Street and the 9 percent gain that Netflix enjoyed at the open turned into a 9.2 percent loss by the time the closing bell rang. A $67 swing or 17.4 percent swing - wow.

What Does It Mean?

The question investors were left with at the end of the day was if the big moves in Netflix, Facebook, Tesla, and Amazon were a precursor of things to come. The bears contend that these names have lost all semblance of fundamental reality and were merely trading on momentum. Thus, the argument follows that the market too may have gotten ahead of itself and is due for some corrective action.

However, there is another, less worrisome angle to consider. Remember that a "whale" investor such as Carl Ichan doesn't just bomb in or out of positions. No, his positions are carefully guarded and carefully traded. In other words, Mr. Ichan didn't just call up his broker and say "Sell 3 million shares of NFLX at the market."

Thus, there is a decent chance that "word" of Ichan's potential sale got out and the resulting dive is what happens when all the algos do the exact same thing at the exact same time. Therefore, yesterday's move in the mo-mo names may have been little more than computer games being played by the big banks and hedge funds.

While no one knows for sure what the "action" will mean going forward, it is important to understand why things got a little hairy yesterday. This way, should the market begin to correct in earnest from here, it will be obvious that stocks had gotten ahead of themselves and needed to correct. And if stocks simply continue higher, well, it means that yesterday's moves were simply another example of computer-driven folly that the regulators will ignore.

Turning to this morning... Concerns about tighter liquidity in China, the lackluster jobs report in the U.S., and an ECB report on the state of Eurozone banks have all put pressure on overseas markets overnight. Not surprisingly, U.S. stock futures are following suit and point to a weaker open on Wall Street.

Positions in stocks mentioned: none


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editor and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.