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Minyan Mailbag: What's Causing the Strange Tape?


The tick action is the reverse of what we saw in the early 1980's.

Prof. Succo,

Sorry to bother you, but I was hoping for greater discussion on your post
"…strangest tape I've ever seen." Could you expand on what you think is happening and suggest/speculate as to why they might be doing this or why they might not be able to achieve their desired actions?

Minyan Chris

Minyan Chris,

I have received several similar questions about that post, which was actually an informal IM to Todd (we regularly discuss the under-currents we see in the markets). If you look at some of my more formal writings you will see that this is a common thread, an increasing one, that I see in markets.

A bull market usually begins with extremely low valuations and is fueled initially by "value" buyers picking up assets of companies at less than liquidation value. At the bottom of a bear market there are more and more of these companies and the amalgamation of them creates strength in the indexes. The foundation for a bull market is built from the bottom up.

This is not one of these markets. Almost all of the buying is being done in indexes first as large entities using high liquidity (cheap money) clamor for exposure to equities. At market tops this activity accelerates as participants become more desperate "not to miss out on the upside." Fiduciary responsibility has been transformed from "protecting risk" to this "cartoonish" endeavor.

How do I see this? Go back and read what some of us have written about the strange "tick" action that we see: every decline is mysteriously reversed by feverish taking of offers on stocks instead of slowly burning out from value buyers putting out bids. I have described the mechanics of this action as the result of large index futures buyers first entering the market and eventually forcing index arbs to aggressively take offers on stocks. The tick action is the reverse of what we saw in the early 1980's.

You can also see it more subjectively in stock action. Yesterday, for example, as the indexes took off, first stocks like Accredited Home Lenders (LEND) ramped up mindlessly with them. As the day wore on, sellers of LEND were coming in regardless of the new highs in the indexes (sellers who just wanted out of the stock regardless of the SPX) and the stock began to under-perform and actually wound up down on the day. This type of action was multiplied in other stocks and eventually weighed down on the powerful index buyers: futures became even too heavy for their buying as arbs actually began selling futures and buying stocks like LEND.

This type of action is typical of major market tops, although they can take time and price to form.

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Position in LEND

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