FADING VOLUME

By Carl Swenlin

READER COMMENT: I have written to you before regarding your comments on volume (“where is the volume?”) which imply that volume “confirms” a move. To me, like many others, volume no longer means anything, or at least not what it used to mean.

 

See the recent speech by Andrew Haldane at the International Economic Association Sixteenth World Congress, Beijing, China, 8 July 2011, courtesy of the the Bank of England; the speech addresses trading volumes here and Europe in the last decade, with special reference to the Flash Crash.Q: Where is the volume? A: It is whatever the quant algorithm says it will be—at least until the algorithm changes.

The speech can be found athttp://www.bankofengland.co.uk/publications/speeches/2011/index.htm. It is the 08.07.11 speech, entitled The Race to Zero.

RESPONSE: First let me recommend that our readers read the referenced speech. It offers great insight into the Flash Crash, and offers the conclusion that there is still nothing that can stop another one. This is a conclusion to which I had come because of the absence of anything but speculation on the subject.

If I understand correctly, you assert that high-frequency trading (HFT) has changed the nature of volume and has rendered useless. In part I agree — I don’t think volume has the same strength of meaning as when we were all charting with a pencil on graph paper, and we were able to say with some certainty that expanding volume confirmed the price move. Now we have to say that this may or may not be the case.

Nowadays I don’t necessarily look for volume to confirm daily moves, because volume doesn’t play a primary role in my decision making, but overall I do expect a bull market to have a level of volume that reflects broad market participation. Specifically, I watch a number we call Percent of Average Daily Volume. This is the result of dividing the 250-EMA of daily volume (the average of about a year’s volume) by today’s volume.

Here is a chart of the 2003-2007 bull market. Note how consistently the volume bars exceed the 250-EMA of volume line. Also, volume steadily expanded from the bottom to the top.

Now, here is a chart of the 2009-2011 bull market. Note the frequency with which the volume barsfailed to reach the 250-EMA line, and the persistent down slope of the volume bars over the last two-and-a-half years. This has been the source of my complaint about volume. It has reflected that something was wrong (at least radically different) internally.

The final chart makes your point regarding HFT. Note that the volume for this bull market has actually been much higher than that of the prior bull market. So while I have been asking, “Where’s the volume?”, it is because of daily evidence that volume has been contracting away from the 200-EMA. I failed to look at the bigger picture.

Bottom Line: The 2009-2011 bull market was a confusing creature based upon consistently weak volume relative to the 250-EMA of volume, and because of gradually fading volume as prices rose higher. Absolute volume is now much higher than in the past because of HFT, which can represent as much as 80% of daily volume; however, in my opinion, the downslope of volume is still an indication of fading participation and is useful input for our analysis.

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NDX STOCKS ILLUSTRATE THE WASHOUT

by Tom McClellan

There are ordinary, garden-variety corrections that occur from time to time. And then there are the sort of amazing washouts like we saw the first week of August 2011 that are in a different class. This week’s chart shows the extreme nature of the washout of selling pressure which occurred.

The drop on August 4 saw 96 out of 100 stocks in the Nasdaq 100 Index reach new 10-day closing lows. That is the highest ever total for one day in at least the last 18 years.

Normally, new highs and new lows are measured with a 52-week lookback period. And that can lead to some very powerful tools. Switching to just a 10-day lookback period for examining these stocks’ price movements is actually an adaptation of work done many years ago by the late Richard Donchian.

Donchian was a pioneering trader of commodities futures who died in 1993. One of the techniques he established is now known as Donchian Channels. It involves plotting on a price chart the highest and lowest price points seen during the last X number of days, and a 10-day or 20-day lookback is a typical parameter. These form a type of trading bands around prices, much like the way that the more modern Bollinger Bands are used by many people today. A “Donchian breakout” occurs when the prices goes above or below the Donchian Channel lines. Price breakouts was the main principle used by the Turtle Traders in the 1980s.

So when we look at this week’s chart of the number of new 10-day lows among NDX stocks, what we are really looking at is how many of those stocks are on bearish Donchian Channel breakout moves. The same can be done for 10-day new highs as well.

Ordinarily, it is considered a bearish event for an individual stock to break below its lower Donchian Channel line. But when we see large numbers of stocks all doing that at the exact same time, then the meaning changes. Readings above 60 tend to mark important short term price bottoms. So getting this indicator all the way up to 96 shows that a concerted and exhaustive selling wave has taken place.

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China tells US "good old days" of borrowing are over

by IBT

China bluntly criticised the United States on Saturday one day after the superpower's credit rating was downgraded, saying the "good old days" of borrowing were over.

Standard & Poor's cut the U.S. long-term credit rating from top-tier AAA by a notch to AA-plus on Friday over concerns about the nation's budget deficits and climbing debt burden.

China -- the United States' biggest creditor -- said Washington only had itself to blame for its plight and called for a new stable global reserve currency.

"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a commentary.

After a week which saw $2.5 trillion wiped off global markets, the move deepened investors' concerns of an impending recession in the United States and over the euro zone crisis. 

Finance ministers and central bankers of the Group of Seven major industrialised nations will confer by telephone later on Saturday or on Sunday, a senior European diplomatic source said.

The source said the credit rating downgrade had added a global dimension on top of the euro zone debt issue, raising the need for international coordination.

"The G7 will confer by telephone. It's not yet confirmed whether it will be in one stage or in two stages, tonight and tomorrow," the source said.

French Finance Minister Francois Baroin, who would chair such a meeting under France's G7 and G20 presidency, said it was too early to say whether there would be an early G7 gathering.

In the Xinhua commentary, China condemned the United States for its "debt addiction" and "short sighted" political wrangling.

"China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," it said.

It urged the United States to cut military and social welfare expenditure. Further credit downgrades would very likely undermine the world economic recovery and trigger new rounds of financial turmoil, it said.

"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.

In Washington, U.S. President Barack Obama urged lawmakers on Saturday to set aside partisan politics after the debt battle, saying they must work to put the United States' fiscal house in order and refocus on stimulating its stagnant economy.

Obama issued the appeal in his weekly radio address recorded shortly before the United States lost its top rating. S&P blamed in part the political gridlock in Washington, saying politics was preventing the United States from addressing its deficit and debt problems.

The president called on Congress to back measures to give tax relief to the middle class, extend jobless benefits and pass long-delayed international trade pacts.

"Both parties are going to have to work together on a larger plan to get our nation's finances in order," Obama said.

"In the long term, the health of our economy depends on it...in the short term, our urgent mission has to be getting this economy growing faster and creating jobs."

In contrast to the Chinese criticism, France's Baroin said France had faith in the United States' ability to get out of this "difficult period".

Baroin said Friday's U.S. unemployment numbers were better than expected and so the situation was heading in the right direction.

"Therefore, one should not dramatise, one needs to remain cool-headed, one should look at the fundamentals," he told France's iTele.

While the impact of the rating cut on financial markets when they reopen on Monday may be modest because the decision was expected, the shift may have a long-term impact for the U.S. standing in the world, the dollar's status, and the global financial system.

"The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA," Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, told Reuters.

NO EARLY ITALIAN ELECTION

In Europe, Italian Prime Minister Silvio Berlusconi on Saturday ruled out calling early elections to stem market panic that has pounded Italian assets and forced his government to bring forward austerity measures.

Italy buckled on Friday to world pressure by pledging to bring forward cuts to balance the budget in 2013 in return for European Central Bank help with funding.

European policy makers are concerned that a debt emergency in the euro zone's third largest economy could completely overwhelm bailout mechanisms set up to help smaller troubled countries like Greece or Ireland.

Italy is due to go to the polls in 2013 but Berlusconi dismissed any suggestion of emulating Spain, where Prime Minister Jose Luis Rodriguez Zapatero has called an early election to tackle the crisis.

"This has absolutely not been talked about," Berlusconi told reporters when asked about the option of bringing elections forward to 2012. "This has never been an option."

The European Union's top economic official praised Italy's decision to accelerate budget-balancing measures and structural economic reforms and said swift implementation was now crucial.

"I strongly support this announcement and call on the authorities to quickly translate it into concrete measures," European Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in a telephone interview.

"This will help to boost potential growth, secure budgetary retrenchment and bolster market confidence. Given the gravity of the situation, such a strategy should enjoy broad support across the political spectrum," Rehn said, giving the first EU response to Berlusconi's announcement.

China and Japan have called for coordinated action to avert a new worldwide financila crisis as has Rehn.

Britain called for a "concerted international effort" to show governments would work together and BRIC nation Brazil also urged unity, saying the world economy was "in a situation of stress."

In fellow BRIC nation India, the prime minister's chief economic adviser said the country's economic growth would not be affected by the cut in the U.S. credit rating and should still come in at 8.2 percent.

"The U.S. has to show that they have a credible plan of fiscal consolidation and clearly the recent deal is not enough." said C.Rangarajan, Chairman of the Prime Minister's Economic Advisory Council.

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It Just Went From Bad To Far, Far Worse As Germany Says Italy Is Too Big For EFSF To Save, Refuses To Carry Euro Bailout Burden

by Tyler Durden

Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.

Dow Jones just hitting the tape referencing Spiegel

• German Govt: Italy Too Big For EFSF To Save - Spiegel
• German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
• German Govt: Italy Must Make Savings, Reforms To Exit Crisis - Spiegel
• Italy Debt Guarantee Could Raise Doubts Over Germany's Finances - Spiegel
• German Govt: EFSF Should Only Help Small, Mid-Size Countries - Spiegel

As a reminder, yesterday's stopgap announcement by the ECB to expand its SMP purchases of secondary market Italian and Spanish bonds was merely as a precursor to full EFSF monetization until its comes fully online in September (or sooner) in a vastly expanded format (between €1.5 and €3.5 trillion).

If Germany is now against this, which appears to be the case, it pretty much means, well, game over.

Add the uncerainty over the unwind of the Europe rescue "gamechanger" as one of the more naive CNBC anchors said yesterday, and Monday is now guaranteed to be a bloodbath.

As for those saying China will gladly step in and fund a $5 trillion EFSF shortfall, they may want to read the following article from Reuters:

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone's crisis.

"I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB)," Tremonti said.

When you talk to Asia they say: "We don't understand what Europe is," he continued. "The second point is that they say 'if your central bank doesn't buy your bonds, why should we buy them"?

P.S. Time to unwind that Bund short we suggested yesterday. In fact, if true, it is time for a big rush to safety.

h/t London Dude Trader

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PIMCO: "U.S. Downgrade Heralds A New Financial Era"

by Tyler Durden

Time for deeply introspective Op-Eds galore. Not too surprisingly, the first one comes from blogging powerhouse Pimco, and its chief literary superstar, Mo El-Erian, titled "U.S. Downgrade Heralds a New Financial Era." While Mohamed's outlook is mostly politically correct fluff, he does bring up the absolutely spot on point that FrAAAnce is about to become FrAAnce, which also means that Germany's worst nightmare: that of backstopping the EFSF entirely on its own, is about to become reality.

From PIMCO

There will be endless debate on whether S&P, the rating agency, was justified in stripping America of its AAA rating and — adding insult to injury — even attaching a negative outlook to the new AA+ rating. But this historic action has now taken place, and the global system must adjust. There are consequences, uncertainties, and a silver lining.

Not so long ago, it was deemed unthinkable that America could lose its AAA. Indeed, “risk free” and “US Treasuries” were interchangeable terms — so much so that the global financial system was constructed, and has operated on the assumption that America’s AAA was a constant at the core, and not a variable.

Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management. Key market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors.

Meanwhile, for the real economy, credit costs for virtually all American borrowers will be higher over time than they would have been otherwise. Animal spirits, already hobbled by the debt ceiling debacle, will again be dampened, constituting yet another headwind to the generation of investment and employment.

It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.

The future role of rating agencies will also now come under close scrutiny, bringing to the fore the question of who rates the rating agencies? S&P’s action will likely unite governments in America and Europe in an effort to erode their monopoly power and operational influence. This will also force all investors to do something that they should have been doing for years: conduct their own ratings due diligence, rather than rely on outsiders.

More worryingly, there will now be genuine uncertainties as to wider systemic impact of this change. With America occupying the core of the world’s financial system, Friday’s downgrade will erode over time the standing of the global public goods it supplies - from the dollar as the world’s reserve currency to its financial markets as the best place for other countries to outsource their hard-earned savings. This will weaken the effectiveness of the US as the global anchor, accelerating the unsteady migration to a multi polar system while increasing the risk of economic fragmentation.

These factors will play out over time, and will possibly do so in a non-linear fashion. Some of the immediate impact will be forestalled by the fact that no other country is able and willing to replace the US at the core of the global system. Other than a general increase in risk premia and volatility, it is therefore hard to predict with a high degree of conviction how the global system will react. Specifically, will it simply come to a new normality, with an AA+ at its core, or are further structural changes now inevitable?

All of that said, there a sliver of a silver lining — and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.

There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.

For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment” — a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.

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First Response To Downgraded "Non-Event": Saudi Tadawul Down 5.5%

by Tyler Durden

Those seeking a harbinger of what may be in store for global capital markets come Sunday 5 pm should look to Saudi Arabia where the Tadawul just dropped by over 5% today.

Sayeth the Telegraph: "The Tadawul All-Shares Index closed down 350.43 points 6,073.44 as all shares tumbled following a tumultous week for global markets which was capped by Standard & Poor's cutting the US credit rating over its $14.3 trillion deficit and debt. "The S&P rating and problems in Europe... have scared investors," said financial analyst Abdulwahab Abu Dahesh. The Saudi market was the first to react globally to the S&P statement late on Friday, with the start of the trading week in Saudi Arabia, while all other markets remained shut for the weekend. Analysts expect markets in Asia and Europe to follow the Tadawul lower on Monday. "Saudi shares have reacted to two events: sharp drops on Thursday in markets, especially oil, and the S&P cut of the US rating," economist Mohammed al-Omran told Al-Arabiya news channel."

Granted Saudi Arabia may be reacting more to the fact that crude plunged by about 15% last week than anything, although absent some very motivated buying force we do believe that some rather substantial downward momentum is imminent, especially once some "unintended consequence" pops up. And when you have a historic event like a US downgrade, there always are unintended consequences.

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