Fool Me Once… Fool the Trading Algos Over and Over Again
Why does the market fall for peace rumors time after time? Let me explain. Also, ever hear of the Great Pumpkin trade?
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Darkness
I had a dream, which was not all a dream.
The bright sun was extinguish’d, and the stars
Did wander darkling in the eternal space,
Rayless, and pathless, and the icy earth
Swung blind and blackening in the moonless air;
Morn came and went—and came, and brought no day,
And men forgot their passions in the dread
Of this their desolation; and all hearts
Were chill’d into a selfish prayer for light.
– Lord Byron (George Gordon), 1816
Ugly Night
Talk about darkness. Talk about anything. At zero dark-thirty. On a Thursday morning. To anyone. The man in the blackened window? Haven’t seen him in weeks. He still rises every night. In central Florida. No handsome reflection here to bounce ideas off of. Wednesday brought some hope. Sort of. The market found interest. In a potential merger between two firms run by the same man. The tech / AI / space trade worked. Again. For a day or a couple of days. Maybe.
There were rumors. Rumors that perhaps a lasting peace between the U.S. and Iran was at hand ran up and down Wall Street. Both the S&P 500 and the Nasdaq Composite rallied. Both of those major indexes managed to recapture their respective 50-day simple moving averages, which is important. Then, it happened. The U.S. ordered several diplomats and their families to leave Saudi Arabia due to threats made by Houthi militants, as that Iranian proxy group carried out more strikes from Yemen.
Oil prices moved higher on that news. Equity index futures moved lower. Much lower. That move came as tensions escalated across the Middle East. According to a report at the New York Times, both the U.S. and Israel are drawing up plans for renewed strikes on Iran. Tehran, for that matter, claims that it has struck more civilian tankers trying to traverse the Strait of Hormuz. It gets worse. NBC News is reporting that the ordered pullout of American personnel went beyond just Saudi Arabia, and extended or will extend to Jordan, Kuwait and Qatar.
Some traders and investors may ask how the market can fall for these supposed peace rumors time after time. I would remind those traders and investors that they got rid of the humans that used to populate trading floors at exchanges and at trading desks and replaced them with high-speed, keyword reading algorithms. Oh, trading is much faster now, and commissions are lower.
That said, you pay more for stock, and you sell stock for less, driven by “unintentional” price overshoot. Shhh. You weren’t supposed to notice that. Say what you want about those ethnic kids from the outer boroughs of New York City that used to represent their customers (hedge funds, mutual funds, large financial institutions and you) at the point of sale… they may have been quirky. They may have been a little feral. They also had common sense. They did not fall for the same tricks over and over again. Your AI-driven algorithms, apparently, have not progressed all that far. Unless, of course, the powers that be, assume that you and I are stupid. Now that I think about it…. Perhaps we are.
Haunted Expectations/Pumpkin Trade
Several high-profile corporations that reported on Wednesday evening have beaten adjusted EPS expectations but have fallen short of projections for unadjusted profitability. I’m talking to you, IBM (IBM), Tesla (TSLA), and Meta Platforms (META). Those stocks are all trading in the hole overnight. Lam Research (LRCX) is trading in the hole and that company did not suffer a unadjusted earnings miss.
There is hope. Ever hear of the Great Pumpkin trade, Charlie Brown? You’ve all heard of the old adages that tell you to go away in May and return in November. You all know that September has a bad reputation and that October scares the heck out of investors. You’re all aware that November and December, perhaps thanks to electoral certainty, have good reputations. You all know about the “Santa Claus” rally that traditionally spans the last few trading days of an outgoing calendar year and the first two days of the upcoming year.
Well, we have one of those “old wives” trading periods coming up next week. The Great Pumpkin, or Halloween trade. Not so famous? No, it’s not. The fact that this period comes with the midterm elections and the trajectory of monetary policy adding to the uncertainty makes it tricky but also may lend it some legitimacy. The Great Pumpkin trade runs through the final four trading sessions of October and the first three trading days of November. That would be next Tuesday through the following Wednesday. Or to simplify, the day before Fed Day through the day after Election Day.
According to a report at Seeking Alpha, dating back to 1990, this trade has produced a profit 81% of the time for the Nasdaq 100 and 75% of the time for the S&P 500. The average return over that time for the Nasdaq 100 has been 2.2% with a median of 2.1%. For the S&P 500, the average return has been 1.6% with a median of 1.4%. This trade has even worked similarly, for the Russell 2000 (75% success rate, +12.1% avg, +1.9% median) which has been pummeled of late. Guarantees? Not a chance. A trade idea? Precisely.
The Good News?
While foreign stock markets and U.S. equity index futures have taken it on the chin overnight and oil prices have increased sharply, investors have sought safe haven, but not in gold. Your fixed income portfolio may not have been your friend this year, but it has been overnight.
This looks to be one of those mornings where your bond book bails out your equity book. I see the U.S. Ten-Year Note yielding just 5.06% this morning, down from 5.13% last night. The U.S. Two-Year Note pays 4.77% this morning after having paid 4.82% last night.
Even the Three-Month T-Bill is getting in on the act, That short-term place to hide cash now pays just 4.16% after having paid as much as 4.2% early Wednesday. Not so good if one wakes up looking to hide cash, but fine and dandy is one is already there.
Just For the Record…
Futures markets at the moment imply an opening drop below the 50-day simple moving average for both the S&P 500 and Nasdaq Composite. Maintaining at least contact with that line is important to the algorithms used by most professional managers. Hence, it is important
to us. Like it or not.
Economics (All Times Eastern)
08:30 – Initial Jobless Claims (Weekly): Expecting 200K, Last 199K.
08:30 – Continuing Claims (Weekly): Last 1.71M.
10:00 – CB Leading Indicators (Sep): Expecting -0.2% m/m, Last -0.1% m/m.
10:30 – Natural Gas Inventories (Weekly): Last +67B cf.
11:00 – Kansas City Fed Manufacturing Index (Oct): Expecting 11, Last 14.
The Fed (All Times Eastern)
Fed Blackout Period.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: HON (2.16), LMT (7.52), PG (1.89), ROP (5.79), R (4.15), VLO (20.95),
After the Close: BE (.67), VRSN (2.46), WDC (4.08)
At the time of publication, Guilfoyle was long LMT, IBM equity.
