Notes From Underground: Algos React Where Global-Macro Traders Fear to Tread

It is time to end the SCAM of “journalists” receiving embargoed FOMC and data releases 60 minutes before the market so they can prepare their stories. In a financial world where volatility is measured in nanoseconds the SEC and CFTC are doing a major disservice to the world of CAPITAL FORMATION by letting the algo headline readers create nanosecond pandemonium through key-word reading algos. I would argue that some “journalists” write the headlines specifically for that purpose.

Today’s release of the FOMC minutes was a perfect example. The markets reacted to a litany of headlines that when placed in the context of the actual minutes resulted in a reversal of sentiment and probably the reversal of fortunes for many investors. (I am not raising this issue because I lost money for I was patient and used the market response as an opportunity to put on some profitable trades.) One specific trade was, of course, the yield curves, which at first acted to FLATTEN as this headline appeared: “MANY FOMC OFFICIALS EXPECTED FED RATE LIFTOFF LATER THIS YEAR.” When the market came to understand that the minutes were far more “dovish” than the headlines posited, the 5/30 and 2/10 reversed dramatically and wound up steepening by the close. Even the EQUITY market, which rallied  on the first headline, “Prudent to wait for clarity on outlook,” then broke on the “liftoff”  citing before rallying for the rest of the day as the dovish nature of the minutes was realized.

After taking 15 minutes to read and absorb the full body of the minutes I can suggest that the most important comment from the FOMC  seemed to be this: “Similarly, the number of workers on part-time schedules for economic reasons was still elevated.” (This is the PTER principle I have previously discussed.) Following this was, “A NUMBER OF PARTICIPANTS NOTED THAT ELIMINATING SLACK ALONG SUCH BROADER DIMENSIONS MIGHT REQUIRE A TEMPORARY DECLINE IN THE UNEMPLOYMENT RATE BELOW ITS LONGER-RUN NORMAL LEVEL, AND THAT THIS DEVELOPMENT COULD SPEED THE RETURN OF INFLATION TO 2 PERCENT.”

This signifies  that a NUMBER, not a few or some participants, but a NUMBER would prefer running HOTTER FOR LONGER. When I read this and then turn back to the speeches of Chair Yellen and SF Fed President John Williams I am forced to wonder who was in that NUMBER of participants for the post-FOMC hawkish tone of the speeches does not resonate with the FOMC minutes and the Williams speech that followed the weak unemployment data. All the Fed communication does not achieve quality transparency for the markets but just adds to the confusion. For the FED, LESS WOULD BE MORE.

*** Outcomes from a perceived dovish FED  and a delay in a rate rise:
1. Yield Curves OUGHT to steepen;
2. A renewed downward pressure on the DOLLAR;
3. GOLD and other PRECIOUS metals finding renewed strength.
The GOLD and SILVER on Wednesday had been strong, with the GOLD closing above a trend line and the SILVER closing above the 200-day moving average for the first time in months. But the initial signals proved false as the SILVER was under severe selling pressure all day today and the GOLD struggled to hold above the trend line violation. Tomorrow is Friday so the silver 200-day moving average is something to watch as will be the GOLD trend line for a confirmation of an improving technical picture.
As I have maintained for a long while, the GOLD FUNDAMENTALS ARE VERY BULLISH BUT THE TECHNICAL PICTURE WAS NOT CONFIRMING THE FUNDAMENTAL VIEW. Let’s see if the price patterns will confirm the fundamentals. Also, the GOLD/SILVER ratio at 0.7250 is trading below its 200-day moving average, suggesting that the SILVER is attaining a more bullish sentiment. As always, do your technical work and find risk tolerance that is comfortable for you.
4. The SPOOS responded positively to the FED‘s “dovishness” and closed on its highs of the day, pushing up toward the August 21 highs of 2029.00 (continuation chart), the day before the August 24 selloff. The Nasdaq 100 is also approaching its high from that day, 43.6825. Just something to be aware of if the equity markets are to find solace in a FED consigned to ZERO for far longer.
Be patient and aware of any market signals pushing for a NEW SIGN OF A RETURN TO THE RISK ON PARADIGM. Again, be patient as earnings season is upon us and the test will be how the market ultimately reacts to poor earning releases. Is easy for longer more powerful than weaker earnings? Readers should look at the latest post to comments from Asherz. It’s very important for the earnings season.

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4 Responses to “Notes From Underground: Algos React Where Global-Macro Traders Fear to Tread”

  1. kevinwaspi Says:

    Asherz’s comments on watching top line growth, and drilling into gross profit margins with earnings reports are spot-on. The past two quarters for many companies have shown back to back deterioration on both measures. Seeing a third quarter of this may just give some managers indigestion.
    I would offer another indicator of interest to me, margin debt.
    The NYSE margin debt data is about a month old when it is published, but the latest debt (mid September) level is down a little over 2.5% month-over-month and about 5% off its real record high in April. There are a lot of oscillations in these broker loan figures, but they do tend to correlate (once they turn) with market turning points.

  2. frank goldak Says:

    I totally agree with the first paragraph, let them write a few different statements to broadcast once we all have the info, no first looks, maybe we can trade more honestly if the people who might have had an edge have to think for once, the playing field is a bit more level. wink, wink

  3. Alex Says:

    How much longer do we all have to put up with the word ‘liftoff’?

    Seems ‘liftoff’ is never here but always coming…

  4. Chicken Says:

    There’s always method to the madness and the horse always goes in front of the cart. FED officials feel obligated towards their future employers.

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