High-Frequency Firms Triple Trades in Rout - I mentioned high-frequency trading in my introduction yesterday and was interested to see this article from Bloomberg this morning. Here is a section:

The stock market's fastest electronic firms boosted trading threefold during the rout that erased $2.2 trillion from U.S. equity values, stepping up strategies that profit from volatility, according to one of their biggest brokers.

The increase from Aug. 1 to Aug. 10 over their 2011 average surpassed the 80 percent rise in U.S. equity volume, showing that high-frequency traders made up more of the market during the plunge, Gary Wedbush, executive vice president and head of capital markets at Wedbush Securities, said in a telephone interview. Wedbush is the largest broker supplying bids and offers on the Nasdaq Stock Market, according to exchange data.

"We're seeing a tremendous amount of high-frequency trading," said Wedbush, whose company is one of the biggest execution and clearing brokers catering to high-speed firms. "Their business is a trading business, and volatility creates far more opportunities. Some of their algorithms and automated systems are trading two, three or five times as many shares as they would have in a more normalized volatility environment."

The role of high-frequency firms in periods of market swings has come under scrutiny since the May 6, 2010, crash that briefly erased $862 billion from U.S. share values. In contrast to their behavior this month, the traders and other professional investors were said to have withdrawn bids as the 2010 selloff worsened, according to a Sept. 30 report from the Securities and Exchange Commission and Commodity Futures Trading Commission.

And:

Regulatory Probe
U.S. prosecutors have joined a regulatory investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said in April. Justice Department investigators are working with the SEC to review practices "that are potentially manipulative," according to Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney's Office for the Southern District of New York.

Algorithms, or strategies that execute bigger orders by breaking them into smaller pieces and sending them to different exchanges, also use high-frequency techniques. Mutual, pension and hedge funds employ algorithms built by brokers or vendors to automate some of their trading instead of manually placing orders in markets or turning to humans to buy or sell blocks.

Wedbush said professionals who add bids and offers on exchanges make trading more efficient and reduce the cost to investors of buying and selling shares.

And:

Surges and rapid declines in the S&P 500 are being driven by institutional investors turning over baskets of stocks and investment banks hedging positions in response to actions by central banks in Japan, Switzerland, Europe and the U.S., Quast said. Institutional investments generally focus on correlation between products and asset classes whereas speculative trading is driven by divergence from historical price relationships among stocks, indexes, currencies and other gauges, he said.

"Institutions are engaged in massive efforts to transfer risk across multiple asset classes because of fluctuations in the yen, franc, euro and U.S. dollar," Quast said. His firm saw shifts in institutional money increase beginning on Aug. 4. "This is causing volume and volatility to increase, which in turn attracts volatility traders," he said.

My view - In the question of which came first: the chicken or the egg - does high-frequency trading respond to volatility or is it a cause volatility? I think it is the latter.

Markets have always been much more volatile than changes in fundamental factors, because people are emotional, especially when leverage is used. Extreme volatility tends to be bearish because it frightens many investors and commentators who see it as a sign of instability. This can have economic consequences if it influences corporate decisions by making managers more cautious.

I do not think that the increase in volatility need be a problem for value investors, provided they are not influenced by it. In fact, it can help them by exaggerating moves, particularly to the downside. This increases buying opportunities.

However, increased volatility can certainly make trading more hazardous, especially for the majority of people who have little interest in sitting in front of screens, monitoring extremely short-term tick charts. In fact, that is physically impossible for anyone who wishes to monitor more than a few instruments, but the machines can do it for thousands of instruments, trading them in a frenzy of algorithmic signals.

We will never get rid of the machines, nor should we. Technology in its myriad forms marches on and is one of mankind's greatest achievements, especially when used for the common good.

However, investors and regulators may wish to consider whether or not high-frequency trading, often defended because it increases liquidity, actually reduces it when liquidity is needed most? Is it a good or bad idea for high-frequency trading to have prior access to price information? Is the industry sufficiently regulated to prevent front-running, scalping or other predatory practices?

John Husselbee: The week that was - My thanks to the author for his latest report, published by North. Here is an interesting sample:

So, where does this leave us? The ability of the US to stimulate the economy through further fiscal spending is surely limited now and any further boost to growth will have to be delivered via the Federal Reserve in the form of more quantitative easing. Indeed, Ben Bernanke, the Governor of the Federal Reserve, announced earlier in the week that interest rates would remain at zero until 2013. This announcement may result in higher inflation with US unable to raise the cost of borrowing for fear of crippling their economy. We do not subscribe to the double dip recession theory despite recent events and believe that very little has actually changed. Our core scenario remains that developed economies plod along on with anaemic growth for the foreseeable future, with drivers of the global growth to be found in the emerging economies, who seem to be getting on top of their inflationary issues. We believe the pitiful coupons and as such returns on US Treasury bonds will encourage more investors to look elsewhere for returns in excess of inflation. Good quality high yielding equities to us are the obvious choice. In stark contrast to the balance sheet of the UK or US government, corporation's finances are in great health and we believe they shall be able to continue to grow their already attractive dividends over time. The equity markets still offer the best long term returns and this week we have taken the opportunity to buy at discounted prices. Once the focus moves away from economies and back to the prospect of companies, we are confident that markets will begin to recover fairly swiftly.

My view - My impression is that more economists than investment managers expect a US double-dip recession. The economic data, including leading indicators, has mostly deteriorated ever since crude oil and many other commodities spiked higher earlier this year. Today's US data was mixed with retail sales improving but perhaps more importantly, consumer confidence slumped to its lowest level since 1980.

The double-dip - or not - question is too close to call in my opinion and the result may depend on a statistical slight of hand. Consequently, while the reported result may seem like a minor issue, many stock market historians would disagree.

They will point out that when US GDP is still growing, stock market corrections are mostly confined to a 10 to 15 percent range for the S&P 500 Index. Other stock markets, being smaller, will usually have somewhat larger corrections.

However, during recessions the S&P's corrections are usually larger, becoming statistical bear markets in the 25 to 35 percent range, and sometimes more as we last saw in 2008/9. To date, the S&P 500 has fallen just under 20 percent.

If the US does avoid a double-dip recession, it will do so with the help of demand from Asia's growth economies.

Stock market weakness is creating a buying opportunity and Eoin provides another interesting share review below. My preference is for high-yielding, successful multinational companies leveraged to Asian-led growth.

It's the Economy, Dummkopf! - My thanks to a subscriber for this article on German attitudes towards money, the euro and other subjects, by Michael Lewis of Liar's Poker fame and published by Vanity Fair. There is too much emphasis on banality, for my tastes but the other sections are interesting.


Interesting, short interview with Hugh Young of Aberdeen Asset Management - Very conservative, he is one of the best and most experienced managers in the region. His funds and ITs also have extremely low turnover. Type Aberdeen in the Chart Library's Search facility and you will see a list of funds and ITs.

I prefer ITs, and further stock market weakness would increase my interest in ABD, AAIF, AAS and NII (listed elsewhere in the Library because it does not carry the Aberdeen name for some reason although it is managed by Hugh Young. His point about redemptions is interesting for the prospective buyer because it increases the discount to NAV at which these ITs trade in a downtrend.

London Riots Were the Bonfire of Consumer's Vanities - This is a good column by AA Gill, published by Bloomberg. Here is the opening, posted without further comment:

I know what caused it, if you're interested. Despite the wisenheimers' head-scratching, garment- rending, finger-wagging and tooth-sucking, I actually do know the reason that out of the clear blue sky we were afflicted with a Biblical, mythological, medieval plague of rioting.

(Don't you agree, by the way, that of all the retrospective experts' tropes and tics, it's the tooth-sucking that's the most offensive?)

It was all the fault of the clear blue sky. It was hubris what done it. We'd actually begun to believe our luck had changed, that we'd cracked the fate thing, the auguries were all promising.

We're not in the euro area -- phew. We've dodged the U.S. downgrade. All the government's "cuts with care" seem to be slowly working, or at least not not working. There's a scintilla of growth. The coalition government felt grown up, the Olympics construction is coming in ahead of time and budget, even the bloody old weather was good. And England is beating India in the test series, we're to about become top nation at cricket, and that's never happened in living memory.

We were lulled and gulled and played for fools, beginning to think we could be winners. It was fatal. The national temperament is pessimistic fortitude. Our factory setting is dull stoicism. We are the nation of good losers, of make do and make tea.

Nemesis came as a letter from Libyan strongman Muammar Qaddafi calling on Prime Minister David Cameron to resign, as he'd lost the trust of his people. Iran offered solidarity to the young freedom fighters in Tottenham. In other circumstances it might have been funny. Seen through a smoking high street, it was galling. But when the politicians got up to the podium and barked that we weren't dealing with protesters, they were common criminals, and would feel the full force of the law, well, it sounded familiar. It sounded like Syria's Bashar al-Assad.

Quote of the week - On security and opportunity:

"There is no security on this earth; there is only opportunity."
Douglas MacArthur

Additional commentary by Eoin Treacy

How is Australia faring during the current period of heightened volatility? - The strength of the commodity sector which continues to represent some of the best performing Australian companies has helped push the Australian Dollar to 40-year highs against the US Dollar. This has put considerable pressure on the domestic economy. Let's look at some examples.

The S&P/ASX 200 Index broke downwards from its almost two-year range last week and found at least short-term support this week. However a sustained move back above 4670 will be required to check medium-term scope for additional lower to lateral ranging.

The S&P/ASX 200 Financial Index has more of a downward bias and also broke lower last week. Commonwealth Bank of Australia (9.41%), Westpac (10.47%), ANZ (9.9%), and National Australia Bank (10.08%) all share a similar pattern. We would welcome some feedback on whether payouts at these levels are sustainable?

Shares such as David Jones (16.84%), Myer (15.38%) and Billabong (8.16%) which either depend on the domestic economy or have to compete abroad in the highly competitive retail sector have been among the worst performers of late. David Jones has become deeply oversold and potential of a short covering rally has increased substantially. Myer is quite similar. Billabong has been deteriorating for a year and a sustained move above the 200-day MA, which would subsequently need to turn upwards, would be required to question downside potential. The dividends for these companies appear unlikely to be sustained.

As with other countries the strong cashflows of telecoms make them attractive in times of crisis. Telstra (13.11%), which has been a serial disappointment for many, surged this week to form a large upside weekly key reversal. A countermanding downward dynamic would now be required to question recovery potential.

In the commodity sector, closely held Coal & Allied (3.16%) surged this week. A sustained move below A$100 would be required to question medium-term scope for some additional higher to lateral ranging. BHP Billiton pulled back to test the A$35 area and a short covering rally appears to be getting underway. It will need to find support above this area to suggest a medium-term low has been reached. Rio Tinto has a similar pattern. Newcrest Mining is among the best performing gold shares, particularly when currency differentials are taken into account. It continues to range above A$35 and a sustained move below that level would be required to question medium-term scope for additional higher to lateral ranging.

The heightened sense of anxiety evident over the last week has exaggerated the differences between Australia's world-beating commodity sector and much of the rest of the economy. This is unlikely to change for as long as the Australian Dollar remains at such high levels. It found support in the region of $1 this week and a sustained move below that level would realistically be required to question the potential for additional upside over the medium term.

.
Email of the day (1) - on Canadian high yielders:

"Thanks for the timely update on dividend players.

"Canadian investors are unfortunately faced with a stiff tax on the dividends from foreign stocks, so we would appreciate it if you could do an update (when you have the time) on Canadian high yielders, where many of the income trusts have converted to stocks.

"Also appreciate if you could add CFX and MMF.UN to the veritable Chart Library.

"Some of the charts also need fixing, either due to missing data or splits:

"LIF.UN, BTE, BA, BNP, CLC, VSN, DH, KEY, PVE, VET

"Thank you"

My comment - Thank you for your kind words and suggestions for the Chart Library. I have added CFX and MMF and updated the others you mention.

Canada is a fertile market for yield hungry investors. The S&P/TSX Index currently has a P/E of 16.37 and 2.7%. Companies in the financial, energy, telecommunications and food sectors tend to yield considerably more. The S&P/TSX has had one of the more impressive bounces this week as a period of short covering begins. However, the Index has been deteriorating since March and a sustained break of the progression of lower rally highs, currently near 13,500, will be required to question the medium-term downtrend.

I last posted the S&P/TSX list of Canadian Dividend Aristocrats on January 14th. Since then the list has contracted from 56 to 39 members. S&P defines a Canadian dividend aristocrat as a company which has raised its dividend every year for the last five. The average yield for the 39 companies is 2.89%.

AGF Management Class B (6.74%), Bird Construction (6.03%) and Enbridge Income Fund Holdings (6.1%) are the higher yielding constituents. Of the three, the latter has the more attractive chart pattern. In common with other pipeline related Canadian shares such as TransCanada (4.1%) and Veresen (7.39%), They have rallied impressively this week to form large weekly upside key reversals. Pipelines are an economically essential sector with attractive yields. This week's lows could potentially represent medium-term lows for these particular shares.

Telus Corp (4.16%) has had a relatively shallow reaction to date. It also posted an upside weekly key reversal this week; having found support in the region of the 200-day MA.

Shaw Communications (4.35%) has been ranging with a mild upward bias for the last two years. It also rallied impressively this week and a sustained move below C$20 would be required to check potential for additional higher to lateral ranging. Bell Aliant (6.91%) has a similar pattern.

The Canadian banking sector has been lauded for its stability since 2008 but has not been immune from the selling pressure evidenced over the last couple of weeks. The S&P/TSX Financials Index found at least short-term support near the lower side of the 2-year range this week but a sustained move above 1750 will be required to question the current downward bias.

Toronto Dominion (3.48%), Bank of Nova Scotia (3.83%) and Canadian Western Bank (1.86%) have all been removed from the Dividend Aristocrat list. I'm not altogether certain why because I see no evidence that Toronto Dominion and Bank of Nova Scotia failed to increase their respective dividends. These two banks have experienced by far the largest reactions within the course of their respective two year uptrends. They found at least short-term support this week and there is further scope for an additional short covering rally. However sustained moves to new high ground would be required to question the current bear market hypothesis. Canadian Western Bank lost upward momentum from March but held onto the majority of its gains. It will also need to sustain a move to new high ground to reaffirm the medium-term uptrend.

Royal Bank of Canada (4.18%) is currently testing the lower side of a potential two-year Type-3 top formation as taught at The Chart Seminar. This week's rally was impressive but a sustained move back above C$55 would be required to defray current scope for additional medium-term downside.

The S&P/TSX Income Trust Index (5.94%) has also posted the largest reaction in at least two years. While it bounced back impressively this week and there is room for an additional short covering rally, a sustained move above 170 would be required to indicate a return to medium-term demand dominance. The UK listed Middlefield Canadian Income Trust yields 5% and has a relatively similar pattern.

Most of the above chart patterns have experienced significant technical deterioration. Sectors essential to the functioning of the Canadian economy offering attractive yields are less likely to be subject to concerted selling pressure than those more focused on the banking sector for example. Canada is replete with high income investment opportunities and these are worth monitoring for signs that medium-term lows are being formed. At present it is too early to make that judgement call for the majority of shares.

Email of the day (2) - on gold's overextension relative to the 200-day MA:

"I refer to your interesting piece about over-extension beyond the 200 DMA, in respect of gold.

"I have a query. You have compared over-extension in percentage terms. Hitherto, I have always thought of and calculated over-extension in absolute terms - is that wrong? My thinking has been that it is the absolute distance away from the 200 DMA which should matter. While I will defer to your superior knowledge, while 20% today looks less than in 2006 and 2008, if gold was to reach $5000, the same 20% would work out to a $1000 deviation from the mean - would we still consider it to be less of a deviation than in 2006/8?

"Just some food for thought but I will be guided by your comments."

My comment - Thank you for this topical question sure to be of interest to other subscribers. I suspect that leveraged short-term traders are much more interested in absolute price moves. However, long-term unleveraged investors are often more concerned with percentage appreciation. As such I believe we need to look at both.

Gold is a much more expensive contract now than it was five years ago. Back then a $10 move could have been considered a dynamic, now it hardly registers on the chart. I find it useful to compare past overextensions relative to a mean such as the 200-day MA in percentage terms because it gives us a valid point of comparison.

Email of the day (3) - on an addition to the Chart Library:

"Please add Vallares PLC (VLRS-London) to the chart library. Thanks."

My comment - Thank you for this suggestion which has been added to the Chart Library.

The Chart Seminar 2011 & 2012 - Following a sell-out tour to Singapore and Sydney earlier this year, The Chart Seminar, now in its 42nd year, will be going on tour again next year. Interest in both our US seminars for 2012 has been brisk so far. The New York seminar is now 37% full and the San Francisco seminar is 38% full. The London seminar in November is more than 50% full.

Anyone interested in securing a place at any of our events should contact Sarah Barnes at sbarnes@fullermoney.com.

The date and venues for my seminars in 2011 and so far in 2012 are:

London - November 3rd & 4th 2011 at the Radisson Edwardian Hampshire

San Francisco - April 16th &17th 2012 (TBA)

New York - April 23rd & 24th 2012 at The Manhattan Club at 800 7th Avenue

The full rate is £950 + VAT. The early booking rate of £875 for non-subscribers expires on September 30th for the London seminar and January 30th 2012 for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

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