Dennis Dick, CFA, is a proprietary trader, and market structure consultant with Bright Trading LLC. He has twelve years of proprietary trading experience specializing in pair trading, crutch trading, momentum, contrarian, technical, and algorithmic trading. His insights into equity market structure have been cited in a number of financial publications including the Wall Street Journal, Reuters, Dow Jones, and Forbes. Dennis is a regular contributor at CFA magazine, and a member of the Capital Markets Policy Council at the CFA Institute. He holds his Business Degree from the University of Windsor with a concentration in Finance and Economics.
Posts by Dennis Dick
Capitulation is a term used by traders that signifies a climactic end to a recent downtrend in the market, coupled with strong volume and a spike down in prices. This is the event where all the buyers finally give up, and throw in the towel dumping their losing positions. Often, after a capitulatory event, the market starts to reverse and strengthen (think March 2009 when the S&P500 futures hit the 666 low).
But capitulation can also occur in the opposite direction, when all the shorts finally give up and cover their positions, and all the johnny-come-latelys, who have watched the rally from the sidelines, finally hop on board and buy stocks. You could call this event “upside capitulation”. This usually signifies a market top, and a correction or pullback often follows.
I think we saw upside capitulation on Friday morning. On the Premarket Prep show, we were discussing the enormous opening buy imbalances in the S&P 500 components. If you want to learn more about imbalances you can click here, but to put it simply, a buy imbalance indicates that there are more buyers than sellers at the open and the stock will open higher.
Usually when the S&P futures are trading up 5 points (which they were in the premarket on Friday morning), we see buy imbalances, as many of the stocks will open higher with the futures opening higher. But Friday was special. The opening buy imbalances were enormous. They were 10-20 times larger than would be expected for a 5 point up move in the S&P futures.
The institutions that were buying the stocks on this open didn’t just want in, they needed in. Whether it was to offset their options or futures positions (it was quadruple witch), or simply to get more exposure, they needed to buy stocks in a bad way at the open, and the opening imbalances reflected this.
GE had a 5.4 million share buy imbalance (typical for GE is 200-300K).
XOM had a 2.4 million share buy imbalance (to put that into perspective, that is $230 million worth!)
JPM had a 1.7 million share buy imbalance
BAC had a 5.4 million share buy imbalance.
WFC had a 2.8 million share buy imbalance.
VZ had a 2.2 million share buy imbalance.
C had a 2.7 million share buy imbalance.
It was huge buy imbalances across the board in the S&P500 components. Billions of dollars worth. In fact, the imbalances were so large, there weren’t enough stock/index arbitrage players to offset the buy demand in the stocks, and the stocks opened much higher than they should have relative to the futures.
Check out these opens:
GE opened up 53 cents at $25.80.
MRK opened up 91 cents at $56.50.
JPM opened up $1.09 at $61.20.
PFE opened up 58 cents at $32.49
T opened up a ridiculous 71 cents at $34.80.
And the stocks cratered immediately. But not only did they crater, they kept continuing to sell-off throughout the day, and it spread throughout the market hitting some of the high flyers the hardest.
BIIB lost 8%, DDD lost 6%, NFLX lost 4%, TSLA lost 2.6%, GILD lost 4.6%.
This was a key reversal day in the stocks and in the overall market. The S&P index opened right at a new all-time high, and then sold off and closed very weak. Many stocks closed at or near their lows of the day. The ridiculous buying off the opening print and then the immediate sell-off that ensued may have been the capitulatory event the bears have been looking for. We’ll know more in the coming week, but it looks like there is a distinct possibility that the institutions that HAD to be in this market on Friday morning, may have just bought the top.
Update: I had a rant on the #Premarket Prep show this morning discussing this scenario and why the market is heading lower:
Exone Company (XONE) lowered guidance after the bell tonight. 3D Systems (DDD) immediately started getting whacked on the news in sympathy, but Stratasys (SSYS), another sympathy play, was slow to respond.
Some might argue that SSYS lowered guidance earlier this morning and their down move was already priced in, but this was not the case. In fact, the stock could not immediately trade lower on the XONE lowered guidance due to the uptick rule.
Yes, the uptick rule still exists, but it only applies in certain situations. The uptick rule still applies if a security drops by more than 10% (which SSYS did today). So nobody can short the stock without an uptick for the remainder of the day (and the following day).
But this rule actually interferes with the natural price discovery process, and uninformed investors can be punished as a result.
Let’s dive into the details of the SSYS trading action after the bell:
The XONE news breaks shortly after 16:05, and everyone gangs up on the offer at $119.06 to try to short SSYS (myself included). You can see how the offer builds in this image:
Then some unfortunate traders decide to place buy orders for the stock and are executed against the $119.06 offer (My offer was not one that was executed).
These traders are completely uninformed because the SSYS price has not fully adjusted for the news, and cannot adjust until a natural seller sells the stock which happens here:
The price drops to $119, and informed traders gang up on the offer again at $119.01 trying to get short:
Eventually another natural seller comes in and the stock falls down to a price of $116 a few minutes later.
My issue here is with the unfortunate buyer of the stock at $119.06. Had the uptick rule not been in place, the SSYS price would have been able to adjust much more quickly, and the unfortunate traders that bought the stock at $119.06 would have likely gotten a much better price.
This is a good example of why we should not reinstate the uptick rule, and in my opinion the rule shouldn’t exist at all as it slows down the price discovery process.
Dennis Dick discusses “Information Arbitrage” at Bright Trading. Topics include high frequency trading, informed and uninformed order flow, strategy, and tactics for more efficient execution.
Bob Bright, CEO of Bright Trading, Rob Friesen, COO of Bright Trading, and Dennis Dick, CFA, market structure consultant at Bright Trading will be offering a FREE webinar today at 4:15 ET.
We’ll discuss the history of Bright Trading and how our traders have adjusted to the new high frequency trading world. We will answer any questions that you may have.
Every so often, a stock can get stuck at a key technical level as the bulls and bears jockey for position. I call these key levels “magnets”. Apple appears to be caught in the $500 magnet.
Take a look at the trading action in AAPL over the past 10 days:
Every time the stock rallies, the rally fails and the stock pulls back to test the 500 support. The opposite has held true as well. Every time the stock has fallen under 500, it turns around and rallies right back over it.
Technically, the magnet continues to hold for a number of possible reasons:
1) Traders have identified this area as support and continue to buy the stock at the 500 level. As the stock rallies, those same short-term traders scalp out of their longs which doesn’t allow the stock to gain any significant upside momentum. Eventually the stock just collapses back.
2) Short-term traders have identified the relevance of the 500 level and continue to short the stock when it pops. Again the stock cannot gather any upside momentum to break the force of the magnet.
3) The whipsaw effect. Traders continue to be whipsawed as they try to play the breakdowns through the 500 level. As the stock falls through the 500 level, longs leaning on that level bail, and shorts jump in playing the potential breakdown. The short-term trading herd moves from being long to being short, and the trade becomes crowded on the short side. The path of least resistance is then higher towards the 500 level, pulling the stock back up.
Regardless of the cause, if a trader can identify these magnet levels early on, there can be some significant opportunity to profit from these “Magnet Trades”, by simply fading the moves away from the level of significance.