Friday, July 16, 2010

Co-movement Mysteries

Hi Stewie:

Here’s some bad stuff. http://www.cnbc.com/id/38057120 It tells how 78% of S&P stocks are now showing co-movement. I think this means that every little wiggle in the chart is moving with the market. And I would guess that this means a stock – that’s been selected for breakout potential – will follow the market instead of behaving individualistically and breaking out like it was supposed to. It could be that the robots are changing the basic rules. Even in the last year or so there may have been significant change.

And here’s a related but different topic that’s been bugging me. I do not understand how co-movement happens. Let’s say you are scalping FAS. Suddenly with no warning there is a sudden drop – which comes back up in two minutes. They call these drops “market maker stop sweeps”. Stops get hit - or the scalper gets scared and sells – and either way the market maker can buy the stock cheaply. OK – that’s probably true. Trouble is – the drop will happen through out the market at exactly the same time. Are all those market makers on the phone with each other coordinating the sweeps? Not a likely explanation. So what is the explanation? I wonder if anybody knows. I googled “co-movement” looking for academic papers. But it was all about longer term co-movement – not second by second.

Tom

2 comments:

Blue said...

Don't try and figure out the why, just recognize the relationship. The why will just drive you crazy and cause you to lose money chasing reasoning.

The market has been one big trade for at least 2yrs. A lot of correlations were broken a while ago. Gold/Oil/Dollar.

FAS is based on CASH SWAPS affected by unregulated derivatives. Dark pool money. They rebalance every day. To avoid the shakeouts is impossible unless you have the stomach for swing trading SMALLER SIZE and trying to filter out all this NOISE!

My only answer is to wait for trading massive momentum. Lately the first hour and last hour of the market. The first 30min has always been one of the toughest times to trade and I simply avoid it. I still see the market trading on three 15min bar moves. That's where all the momo is then chop and grind.

Brandon Hurt said...

I believe its farily well understood there are quants and black boxes that run price up and down on lil vol. And then the institutions kick in after about 1400 NY time, or later. They have their lunch and decide what they want to do and make it happen, all we can do is hope to catch the wave.

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