Monday, May 12, 2014

Stocks hit record highs because........

Well, that's the $64k question tonight.  My favorite explanation of the day was from one of the talking heads on CNBC who said stocks are up because the Dow hit a new high --- ugh.

Anyway, here's what I saw and bear with me because this is not your father's stock market.

There has been a large, persistent seller of the Volatility Index or VIX in the market for the past few months. This measure traditionally measures fear in the market but you can easily influence computer trading platforms that use VIX as a component of their trading formulas.  In a simplified model, assume that you had an auto order system that said buy the S&P 500 in $10 mil increments every time the VIX falls 0.25 pts. Well, if someone forces the VIX down in the premarket, it triggers buying, which in turn pushes down the VIX, which in turn triggers buying and so on.

Remember the good old days when you bought a stock because you thought they could sell a product for more than it cost to make it?  Yeah, those days are long gone.

The second factor that triggered today's melt-up was some panic buying to cover short positions.  Again, many computerized trading platforms have triggers that are fairly well known.  Many of the high-flying dotcoms of the latest bubble were absolutely crushed last week.  This led some late short-sellers to join the fun hoping to make a quick buck.  However, they have tight trading collars on those positions and if stocks start to move up the programs buy immediately.  Thus, when the market opened up a little today, the programs went to work buying more (to cover the short positions), this created more buying and more short covering and before you blinked the market was off to the races.

In perhaps the most troubling news for the US tech industry in recent memory, Reporter Glenn Greenwald will apparently publish evidence tomorrow that is worth noting.  Mr. Greenwald alleges that the NSA intercepts routers and servers being shipped from US companies, "compromises them" (which I read as they install some form of spyware) and then allows them to be shipped to the customer.  At this point few things the NSA does surprise me but if you are buyer of large hardware would you think twice about using anything sourced in the US.


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