The Attack of the Machines and the PIIGS

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This week’s historic market action was an attack of the machines, the high frequency trading algorithms and the ongoing demise of Greece and the other weak countries in the Eurozone. 

We’ll talk about all of this in some detail in a moment but first take a look at how we fared this week. 

Our “Red Flag” mode, expecting lower prices ahead, remains in force and served us well this week, with the portfolios standing year to date as follows: 

Standard Portfolio: +9.7%

2X Portfolio:            -2.1%

Option Master:        +10.2%

 Our star performer for the week was VXX, the ETN that tracks the VIX, the CBOE “fear index,” up +46.25% since our entry on April 9th. 

Looking at My Screens 

Taking a look at the big picture we see a wild and wooly picture with significant changes taking place over the course of just a few days. 


Chart courtesy of

 In the chart of the S&P 500 we see RSI back down in the 30s and the Full Stochastic also below 30, both indicators at oversold levels.  The week’s steep drop solidly broke the 50 Day Moving Average and we now stand just 1.4% above the 200 Day Moving Average which is widely thought of as the demarcation line between bull and bear markets.

For quite sometime we’ve been describing the overly bullish and overbought nature of this market and this week, all of that was erased and now things stand at quite oversold levels.

The View from 35,000 Feet

As I mentioned at the outset, this week was an attack of the machines and the PIIGS that decimated global markets.

The machines are the high frequency trading computers and algorithms that have dominated market action over the last year or so and led to Thursday’s chaotic action.

We’ve heard all sorts of reasons for the 1,000 point plunge, the biggest intraday drop in Dow history, but as far as I can see, prices dropped for the reason they always do; there were more sellers than buyers.

In this case, the computers kicked in their sell programs and there were no buy programs engaged and so there was no market and stocks wound up selling for a penny a share. 

Now already known as the “flash crash,” this remarkable event will almost surely put a whole generation of young math whizzes out of business as Congress and the SEC crawls all over these operations and limits this kind of insane action.

I’m all for it because, and you can call me old fashioned, I don’t think the global equities markets should be an online gambling casino which is what they’ve become with the rise of the “quants” and their hyperactive supercomputers.

As Warren Buffet so famously said, “Beware of geeks bearing formulas.”

So I think the quants are probably dead, or will be soon and it was a nice game for them while it lasted, fleecing the little guy and snagging a cent or two profit here or there on their lightning fast trading programs.

The other wave of this week’s attack was the attack of the PIIGS, and this week Greece continued boiling over and wreaking havoc on global markets.

The EU is having an emergency session over the weekend and expected to announce some sort of short term credit facility for a thousand or more European banks before Asia opens on Sunday evening our time.

The Europeans continue to struggle to get in front of this ever growing crisis as interest rate spreads climb to record highs and the Euro took a 4% hit this week alone.

The scary news is that LIBOR, the interbank lending rate, has been steadily climbing, just as it did in late summer 2007, indicating the potential of a credit crunch just ahead.

As I said last week, just think of Bear Sterns and Lehman Brothers on an international scale. 

Overall, it appears that European banks are on the hook for more than $2 trillion in sketchy sovereign debt, $500 billion from Spain alone.  Yields in Spain soared this week as the sharks start to circle the next weakest fish in the sea.

On the home front, the news was mixed and almost not noticed as the global drama unfolded.

Four banks failed on Friday, bringing the year’s total to 68.

Moody’s is under investigation by the SEC.

Wells Fargo is being investigated over their mortgage lending practices.

Unemployment crept up to 9.9% from 9.7% and while new jobs were created, the U6 figure, the “underemployment” rate, continued its steady climb from 16.9% to 17.1%.

What It All Means

Adding it all up, we’re obviously in dangerous and difficult times and the European situation has extreme ramifications for all of us.  Greece is almost a foregone conclusion and Angela Merkel has made it pretty clear that there won’t be more bailouts down the road. 

So over the next weeks and months we can brace ourselves for more volatility, possible sovereign defaults and waves of banking failures and crises which will make for an interesting summer, to say the least. 

This week we see the potential for a rebound of sorts from a technical basis and if the EU can get in front of this crisis, there is a chance for a return to “normalcy.”  I would guess that the odds favor failure of their efforts and in the extreme, we could see the demise of the Euro and the European Union.  I have some old Deutsche Marks in my drawer so maybe they’ll come in handy somewhere down the road. 

The Week Ahead 

A quiet week is in front of us for both earnings and economic reports.  Greece and Europe will provide all the market moving news. 

Economic Reports: 

Tuesday: March Wholesale Inventory 

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims 

Friday: April Retail Sales, April Industrial Production, May Michigan Consumer Sentiment 

Sector Spotlight:

 Leaders: Short Europe, Short Emerging Markets, Short Russell 2000 

Laggards: Austria, Spain, Solar Energy 

We spent a cool, rainy Saturday afternoon at home munching popcorn and watching Casino Royale, the non stop action thriller starring Daniel Craig.  A little escapism was in order after the harrowing events of last week. 

Tonight we’re watching Quantum Solace, another James Bond opus, since next week’s global markets promise more of the same. 

Disclosure: EEV, VXX, SLV, AGQ,

All the best,                                  To get a Complimentary Special Report from Wall Street Sector Selector, click here:


Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.

Posted 05-08-2010 9:23 PM by John Nyaradi