31 Mar
Blog

Every Market In The World Is “Rigged” & Here’s How to Win: Michael Lewis on 60 Minutes

Rigged
 

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Date: 03.31.14

“Best-selling author Michael Lewis says the stock market is rigged and even the richest, most sophisticated investors are getting “screwed” every day.” –60 Minutes

His Case: Legal Front Running- Speed Wins
Michael Lewis made headlines on 60 Minutes last night when he presented his case that the stock market is rigged by high frequency traders (HFT) –a.k.a Flash Boys (the name of his new book). Mr. Lewis is extremely talented. I strongly recommend everyone read all his books (at least once). I fell in love with his work when I first read Liar’s Poker years ago. The purpose of this article is to shed some light on this otherwise complicated subject. In short, his case is that HFT are taking advantage of speed. He went on to say that the HFT’s are legally front running your (institutional and retail) orders because their algorithms can access and react to buy and sell orders faster than you get filled.
His Solution: Slow Things Down or Use IEX
His solution is to slow things down a little and have all the information arrive at the same time. IEX, a new stock exchange, was born in 2012 that does just that.  The good news is that if anyone is concerned that the market is “rigged’ there is a viable solution available to them right now- IEX. If not, it is business as usual. So what does this mean for you?
Is The Market “Rigged?” I Don’t Think So & Here’s Why:
When someone says the US stock market is rigged- That is a PROFOUND statement with enormous (negative) implications. It implies nefarious activities are taking place and that no one outside that small circle of super fast traders can make any money on Wall Street.  I have a few problems with that argument. First, if the market was really rigged, no one would make any money or have very little chance against the HFT crowd. If that was true how do you explain the huge profits that successful traders, funds, and investors enjoy year after year?
It also implies that HFT’s are “bad” or do something “wrong” for using public information legally and faster than their competition. If that is the case, why not says that pit traders or short term day traders are rigging the market because they are scalping left and right. (Scalping is a term used to describe a very active day trader who wants to take a few cents out of every trade over and over again- all day everyday). Scalping is perfectly moral and legal. Come to think of it, for centuries, before the advent of the modern computer and instant 24/7 quotes, people used to wait for a very long time before they knew where a market was trading- and I’m sure there were a lot of people in between that had access to that information- and used it- before it was disseminated to the world.
When I was a kid, I remember people used to tell me to read the paper the next day to find out where stocks are trading.
Another problem with his logic is that (The following is Courtesy of Bob Pisani & CNBC here): “Proprietary feeds The odd thing about the interview is that they did not bring up the hottest topic around high-speed trading: that high-speed traders have access to a “proprietary feed” that allows them to have a trading advantage over those who rely on the “public feed.” There is indeed a “proprietary feed” which has been provided to anyone willing to pay for it, with the blessing of the SEC, for many years. The core argument is that those who access this proprietary feed can calculate the most current bids and offers (known as the National Best Bid and Offer, or NBBO) quicker than those who get the public feed (known as the Securities Information Processor, or SIP). That can indeed provide a trading advantage.”
How To Beat A Rigged Market:
1. Information Is the Most Valuable Commodity on Earth: Your Job; Use It Better Than Everyone Else
Time is the most valuable asset on earth and information is the most valuable commodity. We live in the age of information- here. Remember information is available for everyone to use. The most successful people on earth know how to use information better than others. That’s it- it is that simple. There is no Holy Grail or secret formula or hidden conspiracy. I don’t think it is fair to say the market is rigged because someone is scalping faster than they used to. If that is the case, every market (clothing, energy, agriculture, technology, hardware, groceries, etc.) in the world is rigged because someone, somewhere, is able to get a better price than the end user can on Main Street.
2. Define Your Timeframe- Longer than a few seconds, you can win.
Even if you disagree with everything I am saying and truly believe the market is “rigged.” You still can win. That is the beauty of capitalism. In order to win (in a rigged or unrigged market) you need to define your timeframe. What are your objectives? What is your edge? & How does time factor into your equation? On Wall Street, if your goal is to be extremely active and trade in milliseconds you will lose- not because of someone else’s fancy algorithm. It is because it is physically impossible for your brain to process information that fast. Meanwhile, if you have a longer time span, you can and (when you learn how to use information the right way), will do very, very, well.
Anyone Can Win on Wall Street & Achieve Their Wildest Dreams:
Capital markets are a fair and are level playing field. It is one of the only places in the world where: Anyone can win. It doesn’t matter where you came from, your education, income, socioeconomic background, IQ, who you know (or don’t know), how fast your computer is or isn’t (Warren Buffett, the most successful investor on the planet doesn’t even use email), or any other “excuse” that comes to mind. The key is to take responsibility for your actions and find an approach that works for you. We all have the ability to achieve our wildest dreams (and then some) on Wall Street. I hope you are able to achieve yours.
Full disclosure: I run Sarhan Capital, a boutique investment and advisory firm & parent to FindLeadingStocks.com. I am not an HFT, nor do I have any money invested in an HFT or an HFT strategy.

28 Mar
Daily Market Commentary

Week In Review: SPX 5-Week Flat Base Continues To Form

SPX- 5 week flat base

STOCK MARKET COMMENTARY:
FRIDAY, MARCH 28, 2014

This has been a very “busy” month for stocks as the market digested a slew of negative headlines (Russia, China, Yellen, etc) and a ton of heavy selling in biotechs, momentum, and growth land. Monday is the last trading day of the month and quarter. So far, the S&P 500 (SPX) is up marginally for the year as it remains perched below record highs. If you step back and listen to the market- (chart above) the benchmark S&P 500 is acting perfectly fine as it builds a new 5-week flat base below record highs. It is perfectly normal to see the market “rest” up here as it consolidates last year’s very strong 29% rally. In addition, volume patterns remain healthy on a weekly basis which suggests we are moving higher, not lower from here.

MON-WED’S ACTION: SPX Flirts With 1850 Area

On Monday, the market was dragged lower by growth stocks, with extra emphasis on biotechs (IBB). A slew of growth stocks were smacked causing the Nasdaq composite and Nasdaq 100 to break below their respective 50 DMA lines. Shares of FB, YELP, GOOG, PCLN, NFLX, AMZN, TSLA, JAZZ, CELG, BIIB, to name a few were all hit as investors dumped growth and moved into other areas of the market. The G7 met in The Hague and issued a joint statement, saying they are suspending their participation in the G8 until “Russia changes course.”
Stocks rebounded nicely on Tuesday after the S&P 500 defended the 1850 area (prior chart highs) and consumer confidence hit a six-year high in March. The Conference Board said consumer confidence rose to 82.3 in March. Separately, the latest housing data was mixed. The Commerce Department said new home sales slid -3.3% in February (largely due to the weather) and the S&P/Case-Shiller index said home prices in 20 cities rose 13.2% from January 2013. Federal Reserve Bank of Philadelphia President Charles Plosser told CNBC that Fed members found were surprised by the market’s reaction to recent policy statements, saying they tried to say quite explicitly that the central bank’s view had not changed.
Stocks opened higher on Wednesday after durable goods beat estimates and rose by 2.2%. The beat was largely due to a strong rebound in the transportation sector. Social media giant Facebook (FB) opened lower after announcing a deal to acquire Oculus VR, which makes virtual-reality headsets. Separately, King Digital Entertainment (KING) declined in its first day as a publicly traded company which is known for making the highly popular mobile game “Candy Crush.”

THURS & FRI’S ACTION: Time For A Bounce?

On Thursday, stocks opened lower but closed near their intraday highs as sellers appeared to be exhausted in the near term. Many areas of the market that were getting hit the hardest, positively reversed, and closed higher on the day. Typically, that means a near term bounce is in the cards. Economic data was mixed. The government said, Q4 GDP was revised up to 2.6% in the third estimate from 2.4%. That was inline with the Street, but was down from a +4.1% gain in Q3 2013. The Labor Department said initial jobless claims fell to 311k for the week ending March 22 from an upwardly revised 321k, easily beating estimates for an increase to 330k. Remember, lower jobless claims are actually healthy for the jobs market. Finally, pending home sales slid in February by -0.8%, which was worse than the 0.2% decrease expected on Wall Street. Stocks were quiet on Friday after consumer spending and personal income rose by +0.3% in February.

MARKET OUTLOOK: New 5-Week Flat Base Forms

It has been very impressive to see the major averages hold up as well as they have considering how bad the sell-off has been in the areas mentioned above. Looking forward, the S&P 500 is trading in a new 5-week flat base with support near 1834 and resistance near 1884. Until either level is breached, one should expect the sideways action to continue. As we have said several times in the past, “At this point, more damaging evidence is needed before the bull market breaths its last breathe.”  As always, keep your losses small and never argue with the tape.

27 Mar
Blog

Market Update: Downdraft Continues… For Now

SPX- Quarterly

Note: The Following is an excerpt from an intra-week update sent to our clients earlier today.

Market Update: Downdraft Continues… For Now
If today’s lows hold, there is a very high likely hood that we bounce from here. If not, the downdraft will likely continue. As mentioned in earlier this week, it is time to play defense until the bulls regain control of this market. A few areas of the market are oversold and remain weak; Specifically, Nasdaq, Growth, and Biotechs. Outside of those areas the broader market looks fine. Keep in mind, Monday is the last day of the month and quarter. So this sell-off could be the beginning of something more severe (a deeper pullback) or just end of quarter profit taking in the strongest areas (Nasdaq, Growth, Biotechs were standout winners this quarter, and have fallen hard over the past week). Here are the facts.
Facts Are Facts; Mixed Tape:
The heavy selling in the aforementioned areas is note ideal and if the selling spills into other areas then expect the pullback to get deeper. Until then, the market has earned the bullish benefit of the doubt and the intermediate and long term outlook remain healthy. Stepping back, keep in mind, the S&P 500 is just building a new base below record highs to consolidate last year’s very strong move (which is bullish). As of Thursday’s open, the S&P 500 and Dow Jones Industrial Average are still above their respective 50 DMA lines. The S&P 500 is trading near 1850 and has flirted with that level almost 20 times in recent weeks. One should expect range-bound action to continue until either resistance (1884) or support (1833) break.
Keep Your Emotions In Check: Bull Markets End in Euphoria, Not Fear
It is very easy to throw in the towel and get consumed with fear. At any given time one can easily point to a long list of “negatives” in the market. Come to think of it, I do not remember or know of any time in history when everyone was positive. Even during the Dot Com bubble in the late 90’s lots of people were worried about extended valuations, profits, revenues, etc. Just like every other bull market in history (present one included) eventually it will end- they all end. At that point, people can easily point to the long list of “reasons” why the market ended.
Markets Move In Cycles:
When in fact, the reality is that markets move in cycles: Up, Down and Sideways. That’s it. Every bull market has a beginning and an end. Ditto for bear markets. Furthermore, bull markets typically do not end in fear, they end in euphoria. So the fact that fear is elevated right now suggests, to me, that the bull market is still alive and well. Remember, we have not had a 10% pullback in almost two years so a decent pullback of some sort will eventually occur and should be welcomed. Until more technical damage occurs, it appears that this is just another short term pullback within a broader uptrend.

 

26 Mar
Blog

Worried About The Latest Market Sell-Off? Pictures Tell The Best Stories

The following is an excerpt from Tuesday’s FindLeadingStocks.com intra-week update. It was sent to all our members in the middle of the trading day:
Market Update:

Not much changed from our comments from earlier this week. We received a ton of great feedback after the update was published as markets near the lows of the day. In the short term the S&P 500 is fighting to stay above 1850 (prior chart highs). It is building a new trading range with 1884 serving as resistance and 1834 as support.  Become A Member Now
 
S&P 500 Building A New Base:
With all the damage in growth-land in recent days, it is encouraging to see the S&P 500 defend the 1850 area, continue trading above its 50 dma line, and is only -1.17% below its record high (printed last Fri- or only two trading days ago). 
 
Pictures Tell The Best Stories:
Intermediate and longer term the action remains very healthy as the market continues building a new base up here to consolidate last year’s very strong gain.  To reiterate, I want to see more technical action before I can say this bull market is over. Keep in mind that we have not had a 10% correction in two years which is very bullish in and of itself.  I have attached a Daily, Monthly, Quarterly, and Annual chart of the S&P 500 for your review. As always, the picture tells a much better story than any one person can.  Join Here If You Want Advanced Entry Points In Leading Stocks And A Ton of  Setups Each Week
S&P 500 Daily Chart
SPX- Daily
SPX: Monthly
SPX - MONTHLY
SPX: Quarterly
SPX- Quarterly
SPX: Annual
SPX- Annual

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25 Mar
Blog

Caterpillar Breaking Out- What It Means For The Global Economy?

Several Strong Setups:

One thing I look for each week is strong setups. Anyone can be a great Monday morning QB and say – look at how strong XYZ is AFTER it broke out. For me, I find the real value is finding the gems before everyone else.

Advanced Entry/Exit Points In Leading Stocks & Strong Setups:
That is why each week we provide our members with Advanced (early) entry/exit points in Leading Stocks AND several high quality setups for your review. This way you are prepared AHEAD of the crowd and can “see” breakouts unfolding in real-time.  Become A Member Now
CAT & UPS:
In our latest weekly report we highlighted 14 strong setups. Two of them jumped out at me and have clear bullish ramifications for the global economy- CAT & UPS. FDX is also setting up very nicely up here. Interestingly, earlier today CAT vaulted out of a very large bullish cup-with-handle pattern and is trading at the highest level in over a year.
Market Headlines Matter More
That is why, IMHO, the market headlines are much more important than what we hear in the media. What does that mean for the global economy? China/Emerging Market Slowdown? etc? etc? As always, we’ll let you decide.
Caterpillar: $CAT
CAT-Global Economy
United Parcel Service: $UPS (actual chart used in our weekly report)
UPS- FLS

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21 Mar
Daily Market Commentary

Week In Review: SPX Next Area Of Resistance & Shrugs Off Bad Headlines

SPX- Next Area of ResistanceSTOCK MARKET COMMENTARY:
FRIDAY, MARCH 21, 2014

The bulls remain in control of this market as the major averages continue to shrug off a slew of “bad” headlines. The benchmark S&P 500 (SPX) is back in the black for month, quarter and year which illustrates how strong the bulls are right now. Since the Feb 5th low of 1737, the S&P 500 jumped a very impressive 8.4%. Remember, in a normal (non QE) world, a 10% move for the entire year would be considered healthy. So +8.4% in 7 weeks is very powerful especially as the market shrugged off several “less than stellar” headlines in recent weeks. As expected the market had a little pullback that was shallow in both size (% decline) and scope (days/weeks, not months). As long as this healthy action continues, the market deserves the bullish benefit of the doubt.

MON-WED’S ACTION: Crimea, Shcrimea, Stocks Rally

Stocks rallied on Monday after Crimea officially voted to leave Ukraine. Stocks rallied not because there was a deescalation but because -so far- there has yet to be an escalation that would threaten the global economy. Crimeans voted overwhelmingly in favor (95.5% of votes cast) to join Mother Russia. The election was a foregone conclusion and the outcome of the election was not accepted as valid by Obama or the EU leaders. The drama continued but the fact that the much anticipated event passed without derailing the global economy helped investors breath a sigh of relief. Economic data in the US was mixed. The Empire Manufacturing Index for March was 5.6, beating estimates for 5.4). The NAHB Housing Market index, which measures builder confidence, fell to 47 in March, missing estimates for 50. Remember, readings above 50 signal expansion.
Stocks edged higher on Tuesday after Putin accepted the referendum. Separately, housing starts slid by 0.2% in February to 907,000 from an upwardly revised 909,000 (from 880,000) in January. A separate report showed consumer prices edged up 0.1% in February after rising by 0.2% in January.
Stocks fell on Wednesday after Janet Yellen accidentally showed the Fed’s hand in her first press conference as Chairwomen. As expected, the Fed said that they will taper QE by another $10B bringing the total down to $55B/month ($25 billion in agency mortgage-backed securities and $30 billion in longer-term Treasuries). Additionally, the FOMC decided to drop the 6.5% unemployment target from its forward guidance. instead the Fed decided to shift the focus to a ‘wide range of information’ on jobs as well as inflation. The big sell off occurred when Yellen answered a question as to what the Fed means by “considerable time” for keeping the current target range for the federal funds rate after the asset purchase program ends. Yellen said “probably six months.” She inadvertently pushed the time table ahead by 6 months. Traders were expecting the rate hike to occur in July and now are looking for April.

THURS & FRI’S ACTION: Stocks Perched Below Record Highs

Stocks rallied nicely on Thursday as investors digested Yellen’s comments and realized that it was not that big of a deal. It quickly became clear that the Fed will remain data dependent and they will continue to support Main Street and Wall Street, if the data weakens. Most recently Bernanke did a 180 when he hinted in May 2013 that the Fed will taper QE 3 in September. The Fed decided not to taper in September and held off to December because the data was not to their liking. What does all this mean for you? The Fed will continue to support Main St and Wall St and that is all that matters right now. In the past, I have even said I would not be surprised to see QE 4 down the road if the economy turns south and inflation remains at bay. On Friday stocks were dragged lower by the Nasdaq and biotech names.

MARKET OUTLOOK: STRONG UPTREND

The market took a small breather and was back up to new highs. It was encouraging to see the bulls quickly regain control as we head into month and quarter end. At this point, more damaging evidence is needed before the bull market breaths its last breathe.  As always, keep your losses small and never argue with the tape.

20 Mar
Media Quotes

Adam Sarhan Quoted in MarketWatch: Home builder ETF wavers near a breakout point as earnings roll in

Market WatchWhile chart watchers got fired up when a play on home builders broke out to a record high last month, the SPDR S&P Homebuilders ETF XHB  hasn’t done much since then.
MarketWatch columnist Kevin Marder and Adam Sarhan of Sarhan Capital were among the technical analysts who pointed out XHB’s bullish move above 34 last month. They weren’t necessarily noting its breakout as a buying opportunity, but rather emphasizing its importance for stocks overall.
“The builders made a move out to a new group high, offering a rebuttal to those who question the sustainability of the economic expansion,” Marder wrote. “As long as building shares remain in an uptrend, it is difficult to become too worried about the risk of another recession.”
On Wednesday, XHB neared its record again, gaining as much as 2% intraday after KB Home’s KBH  earnings beat expectations. But XHB finished Wednesday’s session down 0.1%.
Stocks in general sold off Wednesday as new Fed chief Janet Yellen hinted at sooner-than-expected rate hikes. Analysts noted the hikes could especially hurt builders, weighing on housing demand.
Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, isn’t that excited about XHB. His shop has a neutral or “marketweight” rating on the ETF. He said their analyst team views some builder stocks as having gotten ahead of underlying fundamentals.
“We just think there’s lofty expectations,” Rosenbluth told MarketWatch. S&P Capital IQ is even less impressed with the iShares Home Construction ETF ITB , giving it an underweight rating. That’s in large part due to ITB being more heavily weighted toward builders, while XHB provides more exposure to other housing-related companies like Home Depot HD  and building-materials maker USG Corp. USG 
“We like building-products companies more than we like home builders,” Rosenbluth said.
On Thursday, Lennar LEN  was poised to deliver another boost to XHB, as it posted quarterly results that topped forecasts before the open. Investors also were keeping an eye out for a new reading on existing-home sales due at 10 a.m. Eastern on Thursday, as well as fresh figures on new-home sales that are expected Tuesday.
– Victor Reklaitis
Follow Vic on Twitter @vicrek.
Follow The Tell @thetellblog.
Source: http://blogs.marketwatch.com/thetell/2014/03/20/home-builder-etf-wavers-near-a-breakout-point-as-earnings-roll-in/?mod=MW_latest_news

20 Mar
Blog

Yellen's 6-Month Comment Mostly in-line with Prior Guidance: Why That Doesn't Matter

FED 2014 MEETINGS

Here are my thoughts from yesterday’s Fed meeting:

Overall- I’m still bullish and think the reaction was a little exaggerated.
The big takeaway is that “good” economic data might not be “good” for the Wall Street because that would imply a rate hike might occur sooner than initially expected. Of course, it is still early and the Fed needs to “see” more data before making any material changes to their forward guidance.

What Matters:

Yesterday Janet Yellen held her first press conference as Fed Chair. She handled it quite well considering it was her first time at bat and it is not an easy task. As you know by now, the one mistake was her 6-month comment. Why was it a mistake you ask- especially because it was “in-line” with prior guidance? Investors were largely expecting it to be a little longer than 6-months. Remember that could change – depending on the data but right now- perception is reality.

My takeaway from her comments is that the Fed will continue to do everything in its power to support both Main Street and Wall Street. I highly doubt they are going to step back and let Main Street fall off another economic cliff if conditions worsen. Deep down, investors know this and that is why we saw the stock market rebound after the initial sell-off in the few minutes following her comment.

Short Term Outlook:

In the short term it will be very interesting to see where we close tomorrow and then where we close for the month and quarter. As of Wednesday’s close, the S&P 500 is up 12 points for the quarter and the year which is not a lot but healthy considering how strong it rallied last year.

Perception is Reality On Wall Street

Keep in mind, the only thing that matters in this business is what is actually happening (not what someone thinks should happen). So the fact that various markets around the world reacted the way they did implies that large investors were caught off guard (and or not pleased) by her comment. As always, perception is reality on Wall Street. This reinforces a lesson I learned many, many, years ago: How markets react to the news is a lot more important than the news itself.

20 Mar
Blog

Stupid Is As Stupid Does- Don't Be A Wall Street Fool

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I Love People: 
Let me begin by saying that I love people. People fascinate me. I love learning what makes them tick (pun intended). Why they make their decisions? What fears do they have? What hopes do they have? What is holding them back? Why do some excel while others don’t? Why do successful people succeed at what they do (agree with Todd, hasn’t nothing to do with wealth) while others constantly fail. There are many answers that are beyond the scope of this article. But some common traits successful people share are: focus, tenacity, ability to overcome weakness/obstacles, the ability to remain objective,. analyze facts- not opinions, make hard decisions, change when the facts change, and most important they think right (they know what they want most then work hard to get it).
Why Most People Fail In The Stock Market:
There is an old Wall Street adage that says, making money on Wall Street is simple but not easy. I couldn’t agree more. After studying countless people, I’ve learned that most people fail because they make emotional, not rational, decisions on Wall Street. Most people love money (even though money doesn’t know or love them). So they invariably make emotional decisions when their money is on the line day in and day out. Instead of looking at the chart to see if anything went wrong, they look at the account tick higher and lower. Then end up making hasty decisions. This process causes them to hold on to their losers or sell their winners too soon (successful investors do the exact opposite).
Stupid Is As Stupid Does.
Another reason why most people fail in this business is because they don’t make smart decisions (trying to put this nicely). [Full disclosure, I do not trade in penny stocks, they never appealed to me, nor do I have any interest in trading them. Everything I do deals with liquid institutional quality stocks]. So when I saw this headline earlier this week, I couldn’t help but think- Really? Why would anyone in their right mind in today’s day and age fall for this nonsense??? But people do, they always have and always will. Another adage says: “There’s a sucker born every minute.“

Bugatti-Driving 26-Year-Old Tied to Penny-Stock Website.
Story here

My Solution: Always ask, Is This Smart?
My solution is to always ask myself (in life and in markets) Is this smart? Before I make any decision, large or small. Try this for a month, and you will be AMAZED and how often you catch yourself making “questionable” decisions. Next time you buy or sell a stock- ask yourself is this smart?
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