ALGORITHMIC TRADING:

From The Human Touch To The Software Way

Algorithmic trading is a field in quantitative finance where computer sciences is at least as important as mathematics, if not more and where cutting edge technology is the decisive factor.....

HFT AND DARK POOLS:

Positive or Negative?

Before the 1990s, the way by which stocks were traded in the US was fairly simple: a market participant  made a decision to buy or sell and relayed  this information to a broker, who then routed the order to an exchange....

For the rest of this years market reports please scroll down

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Frequently asked questions

THE FIRST HALF


The first half of 2018 is in the bag, resulting in very mixed returns amongst the major equity indices and underlying sectors. Despite the net positive performance by the broad averages in 2018, seven of eleven industry sectors are negative for the year, highlighting the importance of technology and energy companies (and consumer discretionary which contains two of the FAANG stocks). Looking to Q2, all of the major indexes finished in the green including some with breakouts to fresh all-time highs and double digit returns, however others remain in corrective mode like the Dow Jones Industrials which was up less than 1% in Q2 and remains in the red for the year. A catalogue of ongoing factors have attributed to the diverging performance.




INDEX AND SECTOR PERFORMANCE


Through the first half of 2018 the Russell Micro Index and Nasdaq 100 are the top performing indices with gains of 10.2% and 10.1% and both led the final month of June with returns of 1.2% and 1%. The broader based Composite gained 8.8% while the small cap Russell 2000 returned 7% through the first two quarters. The laggards have been the large cap S&P 500 which is up 1.7% through the first half of 2018, while the blue-chip Dow Jones Industrials Index is the only major index in the red with a decline of 1.8%. The Dow Jones Transportation Index is also negative with a first half decline of 2.5%. The negative performance of both the Dow Industrials and Transportation indices is a major warning signal for Dow Theorists which warrants monitoring throughout the second half of 2018. The tax reform plan is having a greater affect on smaller size companies which historically have had a higher tax bracket than their larger cap counterparts. A more indirect impact from the tax code has been the repatriation of overseas cash on the balance sheets of larger multi-national companies. While this has aided the amount of buybacks which are expected to reach a record in 2018, it has also helped spur a bullish reversal in the U.S. dollar which is a headwind on exports for larger companies who have a greater percentage of revenues overseas. Trade war rhetoric and consequential actions has increased during the first half of the year. Trump's growl has turned into a significant bite as the U.S. and its trading partners impose and retaliate with higher tariffs which in no way will improve trade over the near to intermediate term. Finally on the monetary policy front the Federal Reserve has as expected raised rates two times so far in 2018 with markets now pricing in ~50% odds for another two hikes in 2018. This diverging rate policy relative to global central banks is another tailwind for the dollar, particularly when combined with the increasing pace of quantitative tightening which now stands at $40B per month vs. the $10B monthly pace started back in October 2017. The underlying sectors largely improved in Q2, yet important cyclicals like financials and industrials finished the quarter, as well as June, in the red. Through the first half of 2018 only four of eleven groups are in the green led by discretionary and technology with double digit gains of 10.8% and 10.2%, followed then by energy and healthcare with gains of 5.3% and 1%. Energy led all groups in Q2 with a quarterly gain of 12.7%.




TECHNOLOGY


A month can make quite a difference. After being the top sector for the month of May gaining a little over 7% vs. the previous month, a tumultuous month of June had the S&P 500 Information Technology Index finishing third from the bottom slightly negative at -0.38% for the month of June. Within the information technology sector, the software and software services sub segment was an outlier up +1.26% while the hardware and equipment sub sector finished the month negative at -0.51% The semi and semi equipment sub segment was deep into negative territory for the month finishing at -6.23% and generally keeping the sector in negative territory for the month. The importance of the technology sector and its influence on the economy cannot be overlooked. The sector now makes up more than a quarter of the total market cap of the S&P 500 index. This is its largest percentage since the peak of the tech bubble in 1999, when it topped out at over 30% of the index, and larger than any other sector in at least the last 25 year according to Bespoke Group, so there is a lot of attention paid to its performance. There was not just one element that held the sector back from continuing its strong growth for the year, but a myriad of factors over the June month. The first is the ongoing trade wars between the U.S., China and Europe. The tech sector gets over 50% of its revenue from overseas sources, the second-highest out of all eleven sectors. That could leave the sector vulnerable in two ways. Recent dollar strength makes U.S. goods more expensive to foreign buyers, and could result in reduced demand and the ongoing tit for tat among the 3 nations could result in creased tariffs on U.S. tech exports. The other two factors pressuring the sector was some earnings softness and guidance from some reporting companies during the month and some sector rotation out of technology because of the weakness at the end of the month/quarter. That sector rotation out of technology or window dressing if you will, can also be a testament to the strength of the sector overall and the momentum it has carried into June. So far YTD Technology has been a beast growing 10.16% so far despite a hiccup in June. The bottom line is technology is now in practically everything we do, so it will remain a crucial segment of the economy.




ENERGY


The leading sector in Q2 was Energy with a 12.7% advance, its best since Q4 2011. Bolstering the gain was a 14% increase in WTI crude oil, its fourth consecutive quarterly gain. The supply glut has mostly abated and OPEC recently agreed to relax their self-imposed production caps, but supply disruptions from Iran, Venezuela, and Libya are keeping things interesting. There is growing political pressure on the Saudis to produce even more in an effort to contain gasoline prices ahead of the November elections in the U.S., and though low prices might not be appealing for voters working in the industry, this development suggests we have moved closer to supply shortages rather than a supply glut.




CONSUMER


Retail stocks had a strong June and a very strong Q2 2018. The S&P 500 Retail Index gained over 4.4% for June and 14% for Q2 2018. This, again, helped push the broader based S&P 500 Consumer Discretionary Index up 3.5% for June and up 8% for the quarter, making it the best performing sector of the S&P 500 for 2018. Again, on the flip side, Consumer Staples underperformed the markets. The S&P 500 Consumer Staples Index gained 4% for June but is still down over 2% for the Quarter. Consumer spend is an important factor in U.S. GDP and any signs of strength there should be viewed as a positive for the economy while any weakness should be cause for concern. With Q1 2018 GDP at 2% and a trade wars rampant, cause for concern may be appropriate for the sector.




VOLATILITY


Another theme in 2018 so far is the return of volatility. The question for market watchers seems to be has volatility returned from 2017's abnormally low levels. The answer, at least for the first half of the year, is "yes, but less so in 2Q 2018 than in 1Q 2018 Volatility receded in May and June after returning in February when ETFs based on short volatility bets blew up following concerns of faster rate increases. May's Italy issue was also short lived, and the Trump tariff concerns in June showed up in the VIX but not in other volatility measures. Despite all the noise, the Dow and S&P 500 both closed higher in June.




THE NUMBERS


Overall YTD there have been 36 days in which the S&P 500 has risen or fallen by 1% or more compared to a total of eight in all of 2017. 2017 was an abnormally low year for volatility however. From February through April, the S&P 500 had a total of 29 days with close-to-close moves of 1% or greater. Over half (12) of February's 19 trading days saw such moves. Things did not get much better in March (8) and April (9). However, since then May (3) and June (2) have been much quieter. The June numbers seem surprisingly low considering the angst in the market over Trump's tariffs. Market sentiment seemed to sour in the month and investors often moved to safe sectors like Staples, REITs and Utilities. Part of the answer is in sector rotation itself. Market correlations have been dropping, meaning that sectors move less in lockstep, and cancel out each other's moves which lowers volatility. Given the trade talk, we also measured volatility by looking at the number of days this year when the (multinational and industrials weighted) Dow had a high/low range of more than 1%. There were only four in June (two for the S&P 500) even though it felt like more. Midway through 2018 we have already seen 69 such days against only 11 for all of 2017. This bears out the sentiment that something has changed in 2018. But, looking at just the past two months, volatility seems to be receding. The second quarter saw 13 days with S&P moves of 1% or more, in line with historical averages. The CBOE VIX Index also shows elevated volatility vs. last year but a decline from earlier in 2018. The index peaked intra-day above 50 and closed above 37 on 2/5/18 but spent much of June in the 12-13 range, before the final week saw closes in the 16-17 range, with a June close at 16.72. For 2017, the average was a little over 11. There is plenty in the remainder of 2018 that could bring back sharp moves in stock prices especially since the markets feel jumpier after a few scares already, but the trend is that volatility is receding. The S&P 500 had a 1.7% return for the first half of the year, while the Dow lost 1.8% over the same period. Why? One reason is that the Dow is constructed differently, with stocks weighted by price, not market cap. For example the highest weighted Dow stock Boeing, with a $338 share price, has a 9.4% weight while Intel has a greater market cap but with a $50 price carries less than 1/6 th the weight. For the year so far, Boeing added over $40.60 to its stock price and 275 points to the Dow, while 3M and Goldman Sachs cost the index over 200 points each YTD. Boeing was on pace to add 500 points to the Dow for the year but shed about $36 from its June highs to close out the month. New entrant Walgreen Boots Alliance fell 9.9% a few days after being added. Amazon's announcement it will purchase PillPack, hurt the drug retailer space and also threw shade on the company's first week in the Dow. WBA lost over half of its $12.61 YTD price decline on 6/28 and has "cost" the Dow about 88 points on YTD calculations*. *WBA joined the Dow on 6/25/18, replacing GE, so calculations are adjusted.




IPOs AND M&A


Strong cash levels and lower valuations are helping fuel record buyback activity. According to CNBC, Spending on buybacks, dividends, and M&A may hit $2.5T this year. The forecast is for companies to spend $700-800B on buybacks, $500B on dividends and about $1.3T in M&A in 2018, helped by a large influx of cash following the recent tax cut. The tech sector is seeing very strong buyback trends and leading the market YTD. Buybacks have been heavily skewed toward growth stocks which have seen ~$280B in activity. The top 20% of companies by market cap have accounted for 72% of the buybacks. Separately, Thomson Reuters data shows global deal making has reached $2.5T in the first half of 2018, breaking the all-time high for the period and underscoring the intense nature of M&A activity in spite of increasingly bitter geopolitical tensions. Megadeals led by the U.S. media and telecoms sector helped to lift worldwide deal volumes 65% from the same time a year ago and the most on a nominal basis since Thomson Reuters began keeping data on M&A in 1980. IPOs are also showing a healthy trend. So far this year, 120 companies have raised $35.2 billion via IPOs, the largest number of companies since 2014 and the fourth busiest YTD since 1995. Aided by a strong 37 deals in June alone, Nasdaq welcomed 93 IPOs this year vs. 53 at the same time in 2017.




FUND FLOWS


ETF Fund flows show that money continues to move to U.S. small caps and tech stocks as well as into short term treasuries and higher grade corporate debt. According to Nick Colas of DataTrek (numbers through June 27): Q2 global equity ETF money flows were substantially slower than in Q1, $29.7 billion versus $47.3 billion, and ALL that capital went to U.S. equities this quarter. Q2 U.S. equity flows were better than Q1, at $35.7 billion versus just $4.5 billion. Q2 emerging market equity funds saw outflows of $7.2 billion following Q1 inflows of $12.8 billion. Inflows to fixed income ETFs accelerated in Q2, at $28.7 billion versus $16.4 billion in Q1 Small cap U.S. equity ETFs saw greater inflows in Q2 ($12.1 billion) than large cap equity funds ($8.4 billion)




ARE TREASURIES OFFERING A SIGNAL?


The difference between yields on U.S. 2-year Treasuries compared to 10 year paper continues to narrow. At the end of June, the yield differential was 3 basis points, down from 52 basis points at year end. The Fed is raising rates at the short end of the curve and some would argue that long term rates are too low: suppressed partly by a recent flight to quality given market turmoil and the ECB's continued actions to keep rates low in the Eurozone. Still market watchers are concerned. History shows that once the Treasury yield curve inverts (10s yield less than 2s) a US recession is likely. One thing that might change the current trajectory is inflation brought about by a trade war as goods become more expensive. Let's hope that is not the solution.




LOOKING AHEAD


Among the issues investors will be watching for the balance of 2018 are further signs of a trade war escalation, a potential slowing of corporate earnings growth, economic data, the shape of the yield curve, dollar strength & its impact on multinationals, trading partners and emerging markets, Fed tightening and the risk of a "policy error", and any return of volatility to equities. With regards to "QT" and volatility, Bloomberg says the number of hedge fund managers expecting impending market chaos are growing, with many predicting an end to the rally in asset prices, as central banks move to normalize policies and the rise of populism threatens trade across the globe. One counterweight is the Atlanta Fed's GDP Now model, which has a current forecast of 4.1% U.S. GDP growth for Q2, which would be the highest quarterly growth in four years.





THE INSTRUMENTS OF CHOICE:

Rules To Stick To 

ETF’s trade slightly differently than mutual funds and equities. Investors in mutual funds buy and sell fund shares directly with the mutual fund. Conversely, most ETF investors do not trade directly with the ETF...

MURKY WATERS AND POPULARITY:

Dark pool trading has become more common place in today’s global capital markets, providing a degree of  questionable competition and an alternative to traditional exchanges......

PRICE DISCOVERY:

So important but hindered by technology

The economic role  of an exchange is to handle transactions with superior execution  speed at reasonable cost, find the both sides of a trade,  produce the price.....

EXCHANGE TRADED FUNDS:

The instruments of choice

An exchange traded fund (ETF) is a pooled investment product with assets that can be acquired or distributed throughout the day on a listed exchange at true market prices.....

TECHNICAL ANLALYSIS:

The Essentials

Technical analysis relative to the capital markets  is for all intent and purpose a structured type of  detailed assessment by way of trading charts, engaged for forecasting the direction of market  prices, through the consideration of past market data.....

HIGH FREQUENCY AND APPLICABLE STRATEGIES:

The days when traders sat fixed intently to their various trading screens in a state of  emotionless self imposed artificial autism, manually executing buy / sell orders, based on market information.....

OPTION CONTRACTS:

The Essentials

A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock....

IT CAN GET RISKY:

No matter what investment you ultimately decide to disburse your capital upon, the matter of risk must warrant due consideration, because  when and where there are two or more parties to a investment......

BUBBLES ALWAYS POP:

A long term trend of low Fed Fund and ECB rates, has led the American and European equity exchanges to scale new historical tops.  The cheap cash fuelled long term bull market cycle hit its 8th consecutive year.....

FUTURES CONTRACTS:

The Essentials

A standard futures contract is a bona fide contractual obligation between two parties, to transfer  an underlying asset  class,  at a specified date in the future.....

FUNDAMENTAL ANALYSIS:

The Essentials

Fundamental analysis addresses corporate operational factors beyond the trading session lows and highs of a stock and concentrates on the core and sector activities of the company whose stock it is....

Frequently asked questions

RETURN OF INFLATION


After years of quantitative easing and rock bottom interest rates, inflation is finally returning to advanced industrialized economies. The United States, Japan and Europe have all experienced a pickup in consumer price growth. However, with the exception of the United Kingdom, underlying inflation remains below central bank targets in these regions. Inflationary pressures are likely to grow stronger in 2018, thanks to higher consumer demand and a synchronized global recovery. Against this backdrop, investors can expect central banks to gradually remove policy accommodation throughout the year, with the Federal Reserve and European Central Bank (ECB) leading the charge.




EUROZONE ECONOMIC REVIVAL


The Eurozone was one of the surprise economic stories of 2017, as GDP, employment and inflation all moved in the right direction. The currency region is on track for another year of steady growth, as the economic recovery spreads from the core to the periphery. This could also result in lower unemployment and stronger trade flows from countries such as Germany. Positive eurozone expansion is making the region a more attractive bet for investors and currency speculators. These trends are expected to continue in 2018 as more investors look to capitalize on the long-awaited rebound.




CONTINUED DOMINANCE OF SUPERTRENDS


Supertrends are dominant investment themes that offer stability and consistent growth over time. Backed by multiple, overlapping fundamental catalysts, supertrends usually become staples of a well-balanced portfolio. Investors in search of long-term growth trends needn’t look further than technology, defense and infrastructure. These sectors have not only withstood the test of time, they continue to benefit from strong fundamental catalysts. In 2018, strong economic growth and favorable policies will continue to make these sectors an attractive option for value investors. As the Trump administration beefs up military and infrastructure spending, supertrends will continue to offer plenty of upside.




SPOTLIGHT ON EMERGING MARKETS


Emerging markets have long captivated the imagination of investors in search of higher yield. As China continues to transition from emerging market to industrialized nation, market participants are increasingly looking to India, Africa and Latin America for their next high-growth prospects. The bottoming out of the oil-price collapse is aiding key markets’ return to growth (such as Brazil and Russia). The synchronized global expansion we mentioned previously will shine the spotlight on emerging markets.




LOWER RISK-ADJUSTED RETURNS ACROSS MULTIPLE ASSET CLASSES


2017 witnessed a huge spike in the valuation of risk assets, as volatility hovered near historic lows and perceived risks failed to materialize. Although volatility and risks are expected to remain on the downside in 2018, the market will be prone to periodic sell-offs that could impact overall returns. This environment will place more emphasis on fixed income assets, which can help shield investors from periodic spikes in market volatility. So, while the path was up and up for 2017, the next 12 months are expected to be much rockier.




THE BOTTOM LINE


Now that we’ve introduced the five major themes of 2018, speak with your trader today so we can inform you of opportunities in these volatile markets.





RISK DISCLAIMER

The risk of loss in trading capital market positions can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware of the following:

If you run a capital market position you may sustain a total loss. If you run a capital market position or engage in off-exchange foreign currency trading you may sustain a total loss. If the market moves against your position, you may be called upon by your trader to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the requested funds within the prescribed time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. ​​

​​​The high degree of leverage that is often obtainable in capital markets trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. ​

This brief statement cannot disclose all the risks and other significant aspects of the capital market trading.

​You should also be aware that this capital markets trading advisor may engage in trading foreign futures or options contracts. Transactions on markets located outside the united states, including markets formally linked to a united states market may be subject to regulations which offer different or diminished protection. Further, united states regulatory authorities may be unable to compel the enforcement of the rules of regulatory authorities or markets in non-united states jurisdictions where your transactions may be effected. Before you trade you should inquire about any rules relevant to your particular contemplated transactions and ask the firm with which you intend to trade for details about the types of redress available in both your local and other relevant jurisdictions.