Gaps

by Larry Levin

Have you noticed how often the market gaps open, higher of course, then does nothing all day? Said another way; have you noticed when the market closes that nearly 100% of the net gains had been put in...but at 9:30am EST? One wonders why the market opens at all some days.

In the "Secret's of Traders" course we identify different day-types that estimate what sort of trading environment we're likely to see, such as a trending or very choppy day...or something in between. The "#4-day" is the non-trending type of day that is constantly reversing directions into the close. This is great information to have when you know how to adjust to it; however, it gets a bit frustrating when each day is the same as the last. This month has had the greatest number of #4 days - EVER.

All of this leads me to a very interesting article I read at ZeroHedge which follows. They finished a study that shows 100% of the markets recent gains have come from the overnight market (gap opens) and without them, the market would have been flat for three months.

http://www.zerohedge.com/article/three-month-flat-market-yesif-you-exclude-constant-after-hours-manipulation#comment-172925

Anyone looking at their 401(k) portfolio performance since the end of August will undoubtedly be very happy (and extremely surprised), as the market has climbed steadily higher despite 1) increasingly declining trading volume and 2) consistent and material withdrawals from domestic equity mutual funds. Furthermore, if anyone was merely looking at the trading action in regular hours, one would think there was absolutely no profit made since early September. The reason for that: all the upside since September 14th has come exclusively from after hours action. The chart below demonstrates the relative performance of regular hour trading in the SPY as well as that in the extended session. The notable observations: gaps, gaps, gaps. Every single day, minimal volume pushes the futures index higher. Good news, bad news, it don't matter to the Goldman S&P and Russell 1000 futures desk: they just lift every micro offer, giving the impression that the market is unstoppable, often leapfrogging each other as the latest viagra'ed GDP or unemployment rumor is spread. Come morning, it is time for the HFT brigade to come in and scalp their trillions of pennies while leaving the market unchanged, then at 4pm handing it off again to leveraged futures manipulation and dark pools. In a nutshell, this is the secret of the past quarter's phenomenal market performance.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/volcker/Regular%20%2B%20AH.jpg

A longer-term chart highlights the regime changes since the March lows, when for several months in a row, regular hours would carry the broader market higher, then would flatline, and let the futures trading desks take over. Rinse. Repeat. That way both the HFTs and dark pools end up happy.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/volcker/ES%20Regime%20Change.jpg

The observant among you will immediately realize what this implies: not only is there no volume breadth to the recent move in the markets, but the actual push higher likely occurs on at most tens of thousands of futures contracts on a daily/weekly basis. The fact that literally several blocks of AH trades, used persistently, can move the market higher by 6% over the past 3 months, even as regular trading accounts for absolutely no part of this move, and that the SEC finds nothing troubling about this phenomenon, should be sufficiently telling about how "efficient" US markets have become.

The reason for this focus away from regular hours trading is simple: all After Hours does is provide leverage due to the much shallower trading overnight. Zero Hedge is currently finalizing ES volume data to determine just what leverage the futures desk as JPM and Goldman uses in their interminable push to make the Dow 36,000, working title of "EV/EBITDA = Infinity (Or Better Yet, Negative)? Who Gives A Sh*t: The Fed Has You Covered", the bestseller it was always meant to be.

Oh, by the way there was more economic data today. Consumer's sentiment was less cheerful than expected and new home sales were in a word: terrible.

New home sales toppled like a drunk at an open bar! New home sales crashed 11% in November to a 355,000 annual rate, which are 60,000 below low estimates! The hit includes downward revisions of 42,000 to the prior two months, which means the prior data were either put together by incompetent government boobs or were simply lies. No surprise there.

If that wasn't bad enough, the crash in housing starts wasn't enough to keep down November's supply which stands at 7.9 months and is UP from 7.2 months in October. It would be hard to imagine a worse report for housing at the moment.

Market reaction? Yawn. It closed closely to its open so the overnight buying desks of Goldman and JPM goosed the daily gain again.



Previous Day's Trading Room Results:

Trade Date: 12/23/09

E-Mini S&P Trades*
(before fees and commissions):


1) No "Secrets" trades were filled today.

2) Algorithm positions (3)

3) "Reading the Tape" positions (4) ...combined Secret's, Algo, & "Reading the Tape" total...+6.50



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