Week in Review

[3:44am ET] One of the defining features of the US equity market over the past several weeks has been the furious sector rotation, with one sector strongly bid from the opening bell, but with no obvious catalyst to fan the bullish flames. On Wednesday the Financials were all the rage, followed by Semiconductors on Thursday, and on Friday the economic recovery trade appeared, as Basic Materials and Oil & Gas stocks (i.e., the inflation trade ex-gold) were in high demand from the outset.

All one-day wonders, i.e., no follow-through as the market seems to have amnesia from one day to the next. So, what’s going on here?

We have to assume these are black box strategies, designed to capture relative value (and incrementally increase returns) or to game the system. Like a gun can be used for different purposes, we don’t know the answer; however, the accompanying lack of transparency in the financial markets today hinders money managers from buying large stakes in a company over time. The week-to-week risk of holding illiquid positions simply isn't worth the reward, so everyone is forced to essentially be a day trader -- Buy what is hot in the morning, close the trade on the bell, come into the office they next day and do it all over again.

This gets tiring.

If the insiders have a scam going on, they simply gap open their stocks, and the rest of us are frozen out. However, this situation cannot continue for long. Market volume will contract as traders become disillusioned with the seemingly randomness of trends, burned out by the stress of trying to anticipate the next pocket of strength over the next 24 hours. Participants have to feel the risk they take is worth the potential reward, or they will take their capital elsewhere.

Even American pro traders might start looking to London, Hong Kong, Singapore or Toronto if this stuff keeps up. Nobody is forcing us to trade US listed securities. At the end of the day, we could leave the NY market to the likes of Goldman Sachs and JP Morgan. Then they get to control New York as well as Washington.

Seriously. Have you seen the volume? It’s HB&B’s black boxes making as much as 40% of all trades. And few of us want to be long more than a day. That ain’t healthy for the equity market. Bring in a transaction tax now and I’m sure they’ll have the casino to themselves, ie, nobody else playing.