ET, Phone Treasury ~ The Risk Averse Alert

Thursday, June 03, 2010

ET, Phone Treasury

Judging by today's continuing indications revealing the market remains in a rather precarious technical state, one suspects most financial analysts probably will soon regret what little serious attention they are giving to the market's "flash crash" on May 6th, 2010. Truth is the pall cast that day has yet to dissipate, at least as evidenced via subsequent market action (which, in fact, is where the rubber meets the road).

Considering the May 6th dislocation's gravity, a circle jerk whose effect is resulting in scant improvement in underlying technical conditions ought considerably raise concern among the consensus of observers. Indeed, alarm bells should be ringing! Yet the flash crash appears a largely forgotten, distant memory.

You might recall that, when the SEC in April levied civil fraud charges against Goldman Sachs I suggested silence would be anything but golden in light of shark-on-shark action initiated that day. Ditto May 6th's "flash crash."

Apparently, regulatory authorities have found no reason to look further than mere technical glitches precipitating that day's dislocation. Once these snafus came into play, actions driven by confidence — or, more accurately, lack thereof — took hold. The rest is history, and there is nothing more to say ... at least judging by the deafening silence among the analytical community.

Yet what if we were to think beyond the goofy bids that fed May 6th's death spiral? Should not the fact confidence was on leave in the Mojave remain a grave concern here? Yet this reality has been obscured by a focus on the glitches, as though these were the primary cause of the market's dislocation.

Presuming machines have taken over trading does not allow one to discount the significance of confidence evaporating on May 6th. Machines — so-called "algos" (algorithms) — are abject slaves to real, live, flesh-and-blood people. These things cannot do squat without first being commanded by their masters ... ever.

Truth is confidence evaporated and has yet to return. No matter how complete is silence about this, the fact is plain.


On one hand, concern about recent days' muted volume might seem overdone when one considers that, volume coinciding with the market's February-April advance was even more muted. In seeing this one's thinking might be, if it can happen then, it can happen again.

Trouble is this linear conclusion ignores a larger dynamic wherein the market's February-April advance — occurring on the most subdued volume since March '09 bottom — presented clear evidence of growing weakness — the wall of worry the market must climb if its advance is to prove sustainable was shown to be crumbling — and this weakness was most poignantly confirmed by May 6th's flash crash, as well as by everything transpiring since then, up to and including today.

So, there's a new financial world order distinguishing this moment from early-February. What's more, weakness — earlier signaled and now confirmed — appears to be further increasing. Let me draw your attention to the S&P 500's relative strength...

Contrast RSI's bounce following May 6th's flash crash with its present rebound off late-May bottom. Each of these two reversals higher followed a fairly equal thrashing of the S&P 500. Yet relative strength's present recovery notably is coinciding with considerably poorer price action. Thus, it appears underlying weakness is, indeed, becoming still more pronounced.

SPX 5-min

You might not immediately consider this holiday-shortened week's trading to be "relatively dull," as was thought probable last Friday, but in effect the path trading has taken more or less satisfies that outlook.

Recall it was the market's choppy move higher into its May 13th peak (this following May 10th's surge "celebrating" Bernanke's helicopter drop on the Euro-zone) guiding last Friday's view anticipating this week's ["relatively dull"] trading. Indeed, this similarity in effect (i.e. a choppy move nominally higher) is being demonstrated this week. All the more, too, increased weakness is being revealed by wider swings from negative to positive during this week's churn ever so slightly higher following through on the market's screaming launch off last Tuesday's bottom (May 25th).

Given today's positive conclusion, there's every appearance the CME button could be pushed to drive a strong bid at the open tomorrow, aiming to draw in that special breed of suckers who are easily lathered up by a well-groomed dog tail (employment). Such are the likes who are blind to the fact the dog is foaming at the mouth. One might suspect, though, strong hands feeding these folks probably will be sure to point out the dog's rabid condition before the close of trading. There's no telling what global craziness might develop over the weekend.

With the President and the Vice President both this week regaling the nation with a Miss Cleo look into the prospect of improving employment conditions, one wonders whether this data "pre-release" was, indeed, thought a useful means of extending for as many minutes as possible hope among the hopelessly gullible that, all is on the mend. If only to cement this tirelessly promoted illusion, Gethner was marched out today making claims that, ought to be provoking a far and wide cry asking, "who are you and what planet do you call home?"

Fast Money
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