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This truly appears to be a structural change in the markets and not a cyclical one, I'm afraid. Current market reality is that an overwhelming share of trading activity is based on short-run price forecasts rather than fundamental research. Under these conditions, how can one expect prices to track changes in the fundamental values of the income streams to which the assets give title?
Markets have always been based on a shifting balance between information augmenting and information extracting strategies, but the HFT arms race coupled with changes in institutions and regulation seem to have shifted the balance markedly towards the latter. Unless the structure of incentives is altered to favor longer holding periods, I suspect that we shall continue to see low volume and low volatility as any market inefficiencies that exist are quickly gamed by HFTs.
Changes in the perceived volatility and an acknowledged Fed put have given rise to greater risk taking and greater asset allocations by institutional and retail investors, but it has also served to remove not only all the risk from the markets, but all the doubt as to where the market is headed. Who cares what happens in Europe, if the ECB and the Fed are ready willing and able to provide liquidity. So , the market continues to melt up ever so slowly.
Absolutely agreed it's looking more structural if not long term cyclical if there's still room for "hope and change". I was worried about this over a year ago. HFT taking over, movements slowing to a crawl, then sudden HFT spikes but first a stop hunting spike going the other way in a split second. More bars double spiked in what Al Brooks calls "barb wire". And then no matter what Cramer says, more news driven markets and short term psychological pulses than anything fundamental.
At this point in time it may be more befitting to refer to the Bernank Put as the Bernank Experiment. This is an act of desperation by the Fed to create growth at any cost. Goldman is still forecasting SP at 1200 by end of year/early next year.
As for the nature of the HFT. About a year and a half ago when it started taking over the crude market I began to notice that ever month or two the nature of the volatility would morph into something I had never seen before. And it has continued on this way. Just as soon as you get used to one playbook, it changes. I have learned to expect anything and to be very flexible in my trading.
Pardon me .... but offering low interest rates (i.e. borrowing) at this point seems a bit like offering a chili dog to a person that has just spent 3 days throwing-up from the last one they ate.
They can make it true, with one volatility swap crossed with a risk reversal against a fabricated counter party.. the beauty of derivatives accounting and no regulation...
unlimited risk parameters backed by the US taxpayer also helps...