Yesterday was a very interesting day in the finance world. It was the perfect duopoly – terrible fake news and great positive news.
First, the tweet seen around the world:
Then, a slew of positive economic news:
- Positive Earnings Season
- Housing Recovery Data
- Apple Boosting it’s Dividend
And in the end, the day ended like this:
But what does it really mean? It just continues to show that the machines rule us all.
Black Swan Event: April 22 Fake Tweet Flash Crash
I’ve been predicting since early this year that black swan events are on the horizon. And this had the potential to be a big one. In seconds, volume skyrocketed and a massive sell-off occurred across all sectores. It quickly recovered, but it points to one simple conclusion – the machines are trading massive amounts of stock on Wall Street, based on “news”.
In essence, someone (or multiple people), have hooked up their trading computers to Twitter. Sure, you want to be able to trade quickly on economic news, or even if this Tweet was reliable, you’d want to act before others rush to the doors. Remember, milliseconds count in this game.
The trouble is, what happens when the Tweet is fake? Well, a real rush to the doors for a fake reason.
The writing on the wall is even scarier because it would have only taken one or two more supercomputer trades to trigger an even bigger sell off.
Look at it this way:
- Level 1: Experimental High Speed Trading (HST) looks at ever growing number of indicators, including Twitter and Social Media – Players: Maybe 5-10
- Level 2: Cutting Edge Live HST Programs already integrate real time economic indicators and news feeds – Players: Maybe 5-10, all Major Financial Institutions
- Level 3: “Regular” HST, which everybody does now, looks at live market data to make trades – Players: Every Wall Street and Off-Wall Street Financial Institution
In this flash crash, we probably saw trades from Level 1, and maybe a few players in Level 2. However, as these players made huge market movements, Level 3 players (i.e. everybody else), could have started initiating their trading programs, perpetuating an even deeper sell-off, and potentially a trading halt.
Then, real chaos would have ensued upon starting up again:
- Would trades be canceled?
- Would these algorithms rush to buy oversold stocks?
It would have been a real mess. Luckily it wasn’t, and maybe (just maybe), something was learned from the first Flash Crash, but the bottom line is that the machines rule us now, and control billions of dollars.
In Lighter News, Ride The Bull
On the flip side, economic news is reinforcing several of my predictions earlier this year:
Both of these ideas are continually being proven, and hopefully they will continue to play out as expected.
Stocks and earnings are continuing to grow. A big potential roadblock to this is the sequester, the effects of which are just starting to hit main street. I see this as the biggest potential threat to growth for the remainder of the year, and sell in May and go away might bode well.
You are already hearing the news from the FAA, which is reporting delays in flights across the US. This is just one example of how this will hurt corporate earnings. Millions of workers across the countries are going to get effective pay cuts, which will hurt consumer spending. However, the effects of this should be more short-term than long-term, so I still stand by my long-term bull market belief.
As for housing, I think the same rules apply. Housing continues to be an economic bright spot, and if people are buying now (even with the potential sequester cuts), they don’t have too much fear in their income levels dropping. Plus, with interest rates so slow, and supply constricting, it will make prices rise across the country.
What are your thoughts on yesterday’s events and high speed trading? What about the economy as a whole?