I’ve been a professional trader and broker highly attuned to the markets for 15 years. I have never in that time, even in the mid 2000’s prior to the last collapse, seen such a skew to right side tails. Meaning, no matter what data comes out, what information or expectations of risk events come about, the market propensity to move up is undeterred. Now I know market insiders will say you chalk it up to not fighting the Fed. And well, that used to mean when the Fed eases money markets tend to move up. And yes I agree with that. However, that’s not the phenomenon I’m discussing. Let me give you a visual. Check out the following chart.
What this chart indicates is not only a random walk up due to Fed flooding liquidity into the economy it shows a force or new behaviour in which ‘investors’ are either ignoring their natural aversion to risk events or there is some other force building very shallow supports anytime a risk event causes the market to sell off. I have a very hard time believing traders and algos who don’t care which way the market moves as they get rich on volatility, have any propensity to see markets only move up and thus have no reason to build shallow supports. In fact you hear a lot of traders complaining about the lack of vol in the market. It makes it terribly difficult to make money for brokers and traders in a low volatility market. So then I step back and have a think. Who does benefit from building shallow support levels in the market? The answer seems clear when I think about it that way. The Fed’s entire strategy since the collapse has been one of trickle down economics. Meaning they have openly explained their strategy is to prop up market asset prices which they feel will lead to capital spending and thus jobs and demand. Now we have seen the exact opposite occur. Corporations are smart. They know the smart money is in the market when the Fed is targeting an upward moving market. And so they are reallocating all investments to the market through share buy backs and dividend payouts rather than investing in operations. The result is a slew of additional layoffs, declining median household incomes and less personal spending as we saw in todays numbers. Yet the Fed has refused to accept its flawed strategy. But more importantly they have put all their eggs in one basket. All their hopes of recovery depend on the market continuing its rise despite being at all time highs already with all standard measures of valuation now flashing “OVERVALUED”. Typically in an overvalued market risk events will result in large sell offs. But not this market. Very shallow support floors pop up upon any potential sell off. And so the logical answer, truly just based on logic, is that the Fed is responsible for building these shallow support floors. The Fed has the most to lose if the market collapses as it would be forced to accept a huge costly error in strategy. Something the hubris of central bankers simply won’t allow. I would love for all of us to put pressure on our representatives to formally ask the Fed whether or not it has placed equity orders directly or through a third party (like Citadel) any time over the past 6 years. I expect an honest answer to this question could open up Pandora’s Box.