The NYSE formerly implemented a curb on program trading whenever the NYSE Composite Index moved 190 points or more from its previous close, and remained in place for the rest of the trading day or until the gain or loss had decreased to 90 or fewer points. This curb permitted program sales to be executed only on upticks and program buys on downticks. A program trade is defined by the NYSE as a basket of stocks from the S&P 500 where there are at least 15 stocks or where the value of the basket is at least $1 million. Such trades are generally computer automated. Since over 50% of all trades on the NYSE are program trades, this curb limited volatility by mitigating the ability of automated trades to drive stock prices down via positive feedback.

This curb was fairly common, and financial television networks such as CNBC often referred to it with the term “curbs in.”

On November 7, 2007, the NYSE confirmed that the exchange has scrapped this rule as of November 2. The reason given for the rule’s elimination was its ineffectiveness in curbing market volatility.

That ‘Slow Things Down’ article talks about possibly reinstating the uptick rule and other measures to stop cascading moves. People love to point to the removal of the uptick rule as a major contributing factor in the current slide but I hadn’t heard anybody mention the lack of program trading curbs. I’d sure like to know how the NYSE came to the conclusion that the curbs were ineffective. It seems to me that the removal of the curbs combined with the removal of the uptick rule was a deadly combination.

Jon C. Ogg wrote an article about reinstating program trading curbs last month. Here are a few key points he made (emphasis is mine):

These trading curbs implemented the uptick rule and downtick rule. They affected program trading and were, as they sound, curbs. These weren’t market fixes in times or turmoil but did theoretically keep the swings in check. In the days of “bringing on the free-for-all” these were done away with as being ineffective and unnecessary…

What it really did was enforcing program trading and “curbed” free fall trading days… Traders hated the curbs on the days when the markets wanted to rise and rise. But investors loved the curbs on days where the markets would have slid down and down in an unchecked manner…

It could remove the elation or death verdict of extreme markets. But it could also help prevent some of the crazy and zany trading we have seen of late. Some will hate the notion of this… But a nearly immediate reinstatement could be another mechanism for stability. There could actually be a downside to this. It might also prevent a 1,000 point rally from ever happening in a day.

I sure hope that bringing the curbs back is being discussed along with the more extreme measures that are currently under discussion. Bringing that rule back seems like it couldn’t hurt much and could possibly help a great deal.

Post from: Trader Mike's Blog

Should the NYSE Bring Back Program Trading Curbs?

ShareThis

Like most of yesterday before the fugly close, we started to see some discrimination in the selling. Here’s a shot of the performance by sector:

The financials were one of the better performing sectors today. That’s a very promising sign given that this crisis is driven by financials. Here’s the XLF chart:

The small caps were one of the last areas to get hit and they’re now trying to lead the bounce. Here’s the Russell 2000 chart:

And here are the Nasdaq and S&P 500 charts:

Still no changes

Post from: Trader Mike's Blog

October 10, 2008 Stock Market Recap

ShareThis

As you’ll see in the charts below the indices have fallen between 25% and 35% since the SEC restricted short selling on financial stocks three weeks ago. So much for that plan.

Here’s the VIX:

No changes

Post from: Trader Mike's Blog

October 9, 2008 Stock Market Recap

ShareThis

I was just asked to take a look at another Worden indicator, T2116 — Percentage of stocks trading 2 channels below their 40-day moving average:

What with all the sentiment, breadth, volatility measures out of whack and seemingly in uncharted territory thus making their previous reliability skewed, I was wondering if you might comment on another “T” indicator which tracks breadth envelopes (deviations) below the 40 dma. The T2116 measures stocks that trade 2 standard deviations below the 40 dma. Instead of measuring the % (T2108) of stocks below the 40 dma, the T2116 also measures extreme readings although with a different twist. What kind of readings have you got the last couple of days?

I don’t think I’ve ever looked at that indicator before so I had to look up some info on it. Here’s a little bit about the T2116:

Look for the same patterns described in T2115. Keep in mind that with a 40-day moving average, you will probably see more frequent spikes and higher percentages that with a 200-day moving average but this may give a better short-term picture.

T2115 Percentage of stocks trading 2 channels BELOW their 200-day moving average

T2115 points out instances where too many stocks have surged or plummeted at once by showing you what percentage of stocks are trading 2 channels below their 200-day moving average. The channels are envelope channels and each channel represents one standard deviation from the 200-day moving average. To make the count for T2115, a stock must have fallen very far very quickly in recent trading. Peaks in T2115 naturally coincide with lows in the market because if a large number of stocks are trading well below their 200-day moving averages, then the market is going to be down.

To best understand T2115, pull up the chart and plot a comparison graph using the Dow Jones Industrial Average (DJ-30). Set the time frame to weekly and remember to set your scaling to arithmetic when using the T2 indicators compared to a market index for a true picture of volatility. It also helps to pull the upper splitter bar all the way to the bottom of the chart so you can maximize the viewing area of the top window.

Look at the inverse relationship between T2115 and the Dow during the market surge in the second half of 1997. Just after a pullback in the market around April of 1997, the Dow surged from around 6400 to an amazing 8200 points in early August, a 22% increase. The value of T2115 dove from 14 (14% of the market trading below their 200-day averages) to less than 2.

Although you can see this pretty clearly on the chart, you may be asking “So how is this going to help me in the future?” Well, when T2115 spikes up, and assuming the economy is stable, it’s a good indication that there are some good values out there because this also mean that P/E ratios have gone down. Scroll your chart back to 1990 using the history scroll bar at the bottom of the chart. Look at how T2115 spiked up during the pullback in the second half of the year. T2115 peaked as high as 35%, and we haven’t seen a value higher than 14 since. This was just before the Dow took off on its upward run throughout the 1990s.

Note the key point in there — “assuming the economy is stable”. And here’s a chart of T2115 going all the way back to 1986. As you can see this indicator has blown away its old all-time high. Interesting times we’re in!

And here’s T2116:

Post from: Trader Mike's Blog

Worden’s T2115 and T2116: More Indicators which are Off the Charts

ShareThis

Here’s the VIX:

T2108 has slipped even more and now sits at 2.33

Here are the index charts which each broke yesterday’s low:

No changes

Post from: Trader Mike's Blog

October 7, 2008 Stock Market Recap

ShareThis

T2108 has dropped to levels I’ve never seen since I’ve been trading. I could only find two times when it’s been lower the 6.1% level it closed at on Friday.

I’ve yet to put my IRA money to work b/c I haven’t wanted to chase the gap up opens we’ve had. Perhaps I’ll finally get my chance this week. Besides buying some SPY or QQQQ based on T2108, I’m also searching for some “Turtle Soup Plus One” candidates to buy. (This is all in my long(er) term account, not my day trading account.)

Here are the index charts. There’s really nothing to say about them besides more of what I’ve been saying all last week.

No changes

Post from: Trader Mike's Blog

October 3, 2008 Recap: Thank You Sir, May I Have Another?

ShareThis

The VIX made a slightly lower high vs. Monday but it’s still in rarefied air:

The index charts are below. The most interesting move today was by the Russell 2000 which broke down below its July lows. It’s joining the other indices in the muck of multi-year lows.

No changes

Post from: Trader Mike's Blog

October 2, 2008 Recap: A Quick Round Trip

ShareThis

I imagine we won’t see much follow-through in the market until we get a “bailout” plan from congress that the market actually likes. Hopefully that plan will come sooner rather than later and we can get back to some kind of normalcy by earnings season.

No changes

Post from: Trader Mike's Blog

September 30 Recap: Two Steps Back, One Step Forward

ShareThis

Briefing.com just posted the following note about what’s going on in the credit markets today. This is what many, including Art Cashin this morning, are very concerned about:

Floor Talk: Equity markets rebounding but credit remains very tight
The equity markets are rebounding this morning (Dow +248, SPX +32, Nasdaq Comp +45), which is a positive sign of stabilization, with hope that Congress will eventually pass some form of a bailout plan following yesterday’s rout. However, the bigger story today is taking place in the credit markets, which are not showing the same signs of stabilization. Virtually every measure of liquidity is showing extremely tight credit conditions demonstrating the credit seizure taking place. For example, LIBOR, which is the interest rate at which banks lend to one another, rose sharply with overnight LIBOR rising the most in history — up to 6.88% from yesterday’s high of 3.388%. And although it has since come off those levels, it means banks will lend but they have to pay twice what they did yesterday… The Fed Funds rate, the rate at which U.S. banks lend to other depository institutions through the Fed, rose to 7% this morning, more than 3x the 2% target rate set by the Fed. The fed funds rate has since pulled back from those highs to ~6% after the Fed added $20 bln to the system via a 28-day repurchase operation… Finally the TED spread, which is the difference between 3-month Treasury bills and 3-month Eurodollars (which is essentially the futures market for Libor) is at 3.5347, slightly down from yesterday, but still an extremely historically high elevated level… All this shows that banks are conserving cash now more than ever and are not comfortable lending in this environment.

Post from: Trader Mike's Blog

Credit Market’s are Still Tight

ShareThis

I’ll start with the VIX, which spiked as high as 48.40 today before closing at 46.72. MaoXian has a nice chart showing how important VIX readings near 50 have been over the last 20 years (click for the full size chart and the Chairman’s remarks).

T2108 is back below 20 again. Earlier tonight somebody asked me if I think the market will rally tomorrow because of T2108 and some other oversold indicators. My answer is I have no clue what will happen tomorrow. Oversold can and often does become more oversold. The market can still fall with T2108 being below 20. As you can see in the chart below it’s been lower than it is now in recent years — the August 2007 low was 7.74 and the July 2008 low was 7.99. Having said that, I’ll be buying some SPY or QQQQ tomorrow in my IRA. I’ll have a stop probably about 10% lower and will sell at a profit when & if we get a bounce and I see signs of stalling.

Here are some longer term shots (each bar/candle is 8 days) of the Nasdaq, S&P 500 and Russell 2000 charts. The relative strength in the small caps is still very apparent. I don’t have much to say about the other indices. I know people are looking for the next support level but I prefer to take the advice of one of my favorite trading rules — “bear markets have no supports & bull markets have no resistance“. Sure, there will probbaly be a snapback rally at some point in the near future but I’m more interested in identifying resistance in order to sell that rally.

Everything’s down again

Post from: Trader Mike's Blog

September 29 Recap: Historic Losses and T2108 Heading for Zero

ShareThis