How Much Higher Can Stocks Go?
Minyanville.com takes on that question as we try to make sense of today's market that is dominated by huge exchange traded funds (ETFs) and High Frequency Trading (HFT) robots.
(http://www.minyanville.com) As stock prices continue to ascend with very little interruption, the investing public, experiencing the first winds of inflationary pressures, has begun to question the market’s staying power. Since this run began with Bernanke’s Jackson Hole speech, it has only seen two minor reversals (if they could be called that). Total exchange volume has been reduced dramatically as the only active participants left are momentum players and high frequency traders’ (HFT) computer algorithms buoyed by the Fed’s continuous permanent open market operations (POMO). With both traditional buyers and sellers on the sidelines, what could possibly turn this market around?
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The obvious answer is inflation. Since most of the increasing commodity costs have yet to be passed on to end users, the pain is being concentrated within corporate profit margins. We have just begun to see major companies disappoint in their earnings reports -- notably Ford (F), Cisco (CSCO), and FedEx (FDX). Each of these businesses saw their stock hammered in price after their respective announcements, but those declines had little immediate impact on the markets and have had no lasting impact.
Part of the reason for this loss of leadership among these “bellwethers” is the current structure of the stock market itself. This current market is not what it was even a few years ago.
Much of the change has to do with two fundamental shifts: the explosion in the number and use of exchange-traded funds (ETF) and HFT. Together these changes have led to rising correlations among all stocks, creating the conditions for low volatility that disfavor institutional investors, especially alpha-seeking hedge funds. Volatility has shifted out of stocks and into currency trading, commodities, and even credit, leaving a hole in stock trading volumes.