Here Comes Super Crash aka. Day Of Reckoning

"Someone told me long ago

There's a calm before the storm

I know, it's been comin' for some time"

Market fragility has grown inexorably over the past decade. But like everything else in this decrepit society, it was assiduously ignored. What comes next won't be a mere crash, it will be a super crash. Top down algo-driven market making doesn't work. The Trump casino is rigged to explode...

The idea that HFT computer algorithms could manage the stock market solely using index-levered technical strategies based upon price momentum, was a failed gambit from the beginning. Over time, the disconnect between price and value grows until such time as the reckoning is a one time "event" rather than a function of continuous price discovery. 

As we learn below, we can breathe easier knowing that last week's selloff was accelerated by out-of-control program trading. It was in no way caused by the deteriorating fundamentals. To believe that these programs are still in control is a fool's errand of the highest order.

Last week's mini crash is the latest reason to buy stocks - it was only due to poor liquidity and technical momentum failure:

"The drastic moves in stocks and yields were merely driven by technical flows in an environment of poor liquidity, says J.P. Morgan’s Marko Kolanovic."

“Despite fundamental risks, recent equity and bond moves were mostly technically-driven”

In other words, fundamental risks are extremely high, but they don't account for why the market tanked. That can instead be ascribed to low liquidity momentum strategies that happened to have failed for no apparent reason. Just buy the market and never know why one day you should have sold for some random unforeseen reason. 

Due to the rise of HFT, there is now a belief that markets are priced based upon what someone last paid for something, irrespective of fundamentals. This is the guiding principle behind high frequency trading and so-called "quant" strategies.

I have no doubt that these strategies are what is moving markets on a short-term basis, however, they are also causing the kinds of disconnects that lead people to believe that fundamentals no longer matter. Unfortunately, contrary to popular belief, over-valuation can never be "priced in". These strategies have created a value gap below the market, representing the difference between where markets are trading now based upon momentum HFT, and where they would be trading if fundamentals were the primary factor. Let's say because one day the momentum strategies fail for no apparent reason.

Index-driven strategies are what have allowed the market to disintegrate below the surface of the S&P futures, on a scale we've never seen before:

Eighty percent of trading is now carried out by computers, which is why so far the downturn in human trader sentiment hasn't impacted the market. Worse yet, today's pundits point to the recent decline in bullish sentiment as a contrarian reason to buy stocks. Meanwhile, the algos are still bullishly positioned, across volatility, oil, treasury (shorts), S&P futures etc. Which is why the downturn in social mood has yet to be "priced in" to the market. These momentum strategies continue operating in a vacuum of reality right up until they fail due to low liquidity and reversing price momentum. 

All of which is a disaster wanting to happen, warned over and over again by the various flash crashes that have taken place over recent years. Including the one last week that is already being used as an excuse to buy more stocks. 

"Valuations don't matter"

"Concentration risk doesn't matter"

"Volatility doesn't matter"

Or does it? Apparently JP Morgan doesn't know what JP Morgan is saying:

"A familiar bogeyman is lurking alongside the gut-wrenching swings across assets of all stripes: illiquidity. It’s problematic even by the dire standards of August, according to JPMorgan Chase & Co."

As volatility rises, market depth declines exponentially, exacerbating price moves"