The second half of my thesis has been that HFT bots thrive in the artificial drip-levitation conditions created by the Central Bank monetization programs, and that any high volume asset re-allocation would lead to a massive failure of the market making system...
ZH constantly reminds us that the stock market has devolved into a glitch-ridden latent fiasco on the verge of systemic breakdown. Much of this structural change occurred during the past four years with the parabolic rise of High Frequency Trading (HFT), which squeezed out the traditional market makers in order to massively increase the profits of the recently privatized stock exchanges i.e. NYSE became a "for profit" entity in 2005 coinciding with the escalation in HFT-based transactions.
So then the question on the table is, what will lead to a high volume asset allocation, and is one already underway:
Major asset allocations are driven by:
1) Change in the underlying economic fundamentals leading to modified profit outlook
2) Flight to safety due to exogenous event aka. 'Black Swan' aka. B.S. event
3) Overvaluation
4) Reduction in monetary stimulus - monetary tightening
Ironically, the 'Flash Crash' of 2010 was itself considered a B.S. event - i.e. it was "rare and unpredictable" to those who have their heads firmly planted up their own asses. In any event it certainly led to an asset re-allocation - if only temporarily - out of the stock market. The meltdown in 2011 was arguably caused by the U.S. debt downgrade B.S. event, in conjunction with the ending of QE2 Fed stimulus i.e. factors (2)+(4).
Today, however, we face at least three of these potential catalysts for high volume re-allocation out of stocks. As I noted recently, interest rates are rising at the same time as the profit outlook is weakening. Meanwhile, the Fed is now debating when to taper its latest QE program, so that combination ticks the boxes on (1) and (4). Meanwhile, ironically, market apologists have been saying for years that the reason why stocks are not overvalued, is because interest rates are so low. However, the recent backup in interest rates has created more competitive asset allocation alternatives in fixed income, and it has also raised the discount rate, thereby lowering the present value of future profits. Tick box number (3).
So, it appears that we are only waiting for another Black Swan (B.S.) excuse to begin the major stock liquidation that will in no way be controllable by the HFT Bots who are here for a good time, but not a long time. As we all know, heavy selling has a way of creating its own newsworthy rationale and otherwise exposing various leveraged trades that never should have been made in the first place.
One Chart to Rule Them All - Overbought, but turning up...
As I have noted before, the last two times the TRIN 200 DMA seriously turned up- indicating increased selling - the market tanked. Of course, it wasn't as overbought previously as it is now, meaning that there hasn't been any significant selling for almost two years now...
