Let's not dwell on who caused the "flash crash." Can we just agree that it wasn't one person, that it was likely caused by a confluence of events?
Good. Then we can concentrate on more interesting issues: can it happen again? What changes have been made and what further changes ought to be made?
Can it happen again? Sure it could, but the chances that it would happen in the manner it happened have been reduced. Here's why:
1) Stocks cannot go to a penny like they did on that day. One of the most damaging developments was to see, for example, Accenture go from $40 to $0.01, Boston Beer go from the $60s to $0.01 (all off of the NYSE floor). These "stub quotes" were never meant to be serious bids; they were merely placeholders for market makers. One of the first actions regulators took was to ban these "stub quotes." Now, market makers have to post bids and offers within 8 percent of the National Best Bid and Offer (NBBO).
2) New circuit breakers halt individual stocks if there are sudden price swings. Five years ago, each exchange had its own rules that governed when individual stocks would be halted for sudden volatility. This confusing mishmash has been eliminated: there are now consistent system-wide circuit breakers for all individual stocks (known as limit up/limit down), as well as revised market-wide circuit breakers that will kick in when the S&P 500 drops 7 percent or more during the trading day.
On the fifth anniversary of the Flash Crash, I sat down with SEC Commissioner Dan Gallagher to talk about what changes have been made to the way trading has been conducted since then.
The conversation quickly turned to Dodd-Frank.
Why the sudden left turn? Because the SEC staff has been consumed by writing rules for Dodd-Frank for the past four years, practically to the detriment of everything else, and it's not over, not by a long shot.
Gallagher wants to spend more time on strengthening the trading system, but Dodd-Frank is taking up all the time.
"These are all hugely important things that are critical to the agency, but we're not spending time on them because we're doing silly rules like some of the ones we've been handling the last couple of months. Dodd-Frank has been an awful distraction to the agency, and I'm hoping that, although it's the law of the land and we have to implement the remaining 50 percent, that we can prioritize other, more important things ahead of it," Gallagher said.
"This is my fourth year as commissioner, I've been on the staff before, and I can tell you in the past four years we are somewhere between 10 and 20 times the number of normal rule writing capacity," Gallagher told me.
To back up his point, he starts reeling off statistics: 2,319 pages of legislation that has produced roughly 400 mandates to regulators. These must be turned into rules, which requires staff to write, research, and evaluate them.
"We'll be doing this for another five, ten years," he said.
What has this done to the SEC? I assumed the staff has increased to deal with the additional rulemaking burden.
"It's increased but not commensurate with the burdens that Dodd-Frank placed on us. And really, to me, Bob, the burden isn't necessarily as much as the regulations that came from Dodd-Frank. Some of them are just completely nonsensical. I mean, nothing to do with the financial crisis, aren't really germane to the function of the SEC and that's what happens when you get a runaway piece of legislation."
Tell me how you really feel, Dan.
Stocks are having a bit of a hissy fit over higher yields. Bond yields were sharply higher in Europe this morning, and midday the U.S. 10-year yield is at 2.18 percent, up 3 basis points, highest since early March.
One factor is oil, which is moving to new highs for the year, along with a recent rise in other commodities like copper and aluminum, all of which is igniting a debate about inflation.
The yield rally seems to have started in Europe, particularly in German bunds, right after the U.S. markets opened.
Yields really began to move up about the time the ISM Services report was released at 10 a.m. ET. It came in at 57.8, above expectations of 56.5, and more importantly the employment component also showed some improvement, suggesting that Friday's nonfarm payroll report may come in on the high side of expectations.
Interest-rate sensitive sectors like REITs, Utilities and Home Builders have been under pressure all morning, down roughly 2 percent.
Several ETFs have seen heavy volume including the Russell 2000 ETF, which makes sense since small-cap stocks are more interest-rate sensitive than large caps.
With the long end of the curve backing up, some banks have been moving up. JP Morgan, for example, is at a 15-year high.
What's all this mean? There's no doubt that some bond traders have been stopped out of their positions in European bonds; German bunds, for example, have gone from 16 basis points to 52 basis points in just the last few days.
For the moment, let's just keep to it to a hissy fit. However, if we see a strong move up in nonfarm payrolls for April—particularly with a revision for the weak March numbers—and commodities continue to rally, then the bond selloff may have some real legs.
No wonder the U.S. stock market has lagged this year. Investors are putting all of their money into international funds and ETFs.
TrimTabs founder Charles Biderman called me to lament that the only marginal buyer of U.S. stocks are the companies that issue the shares themselves.
The good news: Biderman noted that U.S. corporations continue to buy back stock at a near-record pace. The float of the U.S. stock market has gone down $337 billion year to date (net of all new shares including insider trading). That's a lot. The record was $457 billion in 2013, for the full year.
The current float of the U.S. is $27 trillion, so that's a decline of about 1.5 percent. That's significant.
Remember, prices are higher than in 2013, so companies may be spending more but they're buying back less stock.
The bad news: The retail investor has his or her head elsewhere. There have been outflows from U.S. mutual funds ($21 billion) and ETFs ($25 billion) both year to date and for the month of April.
Instead, investors have been pouring money into international mutual funds ($41 billion) and global ETFs ($64 billion).
What's it all mean? It means U.S. corporations are the main buyers of U.S. stocks right now.
The lack of a big retail buyer is a headwind for U.S. stocks. Last year, Biderman noted we had the benefits of quantitative easing and a float shrink; now we just have the benefits of float shrink.
Just because American investors have gone overseas, it doesn't mean they won't come back. And remember, we are now 75 percent of the way through earnings season. There is a blackout period of several weeks for most companies during earnings season, during which time they do not buy back stock.
That period is now ending, and it's possible the renewal of buybacks could push us decisively into record high territory.
Sell in May and go away? It's a little more complicated than that.
We asked our partners at Kensho to look at the last 20 years of May to October trading, as well as November to April.
From the May to October period, the S&P 500 was positive 65 percent of the time, or 13 of 20 occurrences, for an average return of 1.4 percent.
For the November to April period, the S&P 500 was up 85 percent of the time, or 17 of 20 occurrences, for an average return of 7.1 percent.
Bottom line: The S&P 500 was up more often from November to April, and with better average return, than the period from May to October.
There is something to the idea that May to October underperforms November to April.
Does that mean you should pull your money out on May 1 and put it into bonds for six months? Reasonable people can differ, but I would certainly advise against it. If you have an allocation of, say 60 percent to stocks, than you should stick with that.
And I would certainly advise against buying bonds in this environment, with the very real possibility of a drop in prices as we move closer to a Fed rate hike.
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.
A poor end to the month as key "long" trades unwind a bit.
Remember the three trades that have been the biggest winners this year:
1) long the dollar
2) long Germany
3) long Healthcare, particularly biotech.
These are what traders call "crowded longs," that is, a lot of traders have bought into these trades and are sitting on a lot of profits.
All three of those trades have come unwound a bit this week.
What happened? First, weak economic data in the U.S. has caused the dollar to weaken—the Dollar Index is down nearly 4 percent just this week.
That's one "long" trade that's not working.
As the dollar has weakened, the euro has strengthened. That's bad news for the German stock market, down more than 4 percent this week, because a stronger euro makes that country's exports more expensive.
That's a second "long" trade that isn't working.
Finally, some recent disappointments in earnings from several biotech companies, including leader Biogen, has caused a pullback in that space, with Biogen down almost 12 percent this week alone.
That's strike three: none of these three long trades are working any more.
As traders "lighten up" and pull money out of their winning trades to preserve profits, this is having an effect on other sub-sectors that were doing well.
For example, airlines were trading near the high end of their range recently, but are down almost 5 percent this week. Retail stocks were market leaders, but this week the group is down 4 percent. Same with home builders—market leaders coming into April, but down 8 percent for the month, 5 percent this week.
What to do? Maintain perspective. Today's economic data indicated the jobs market—and wages—are continuing to improve.
As for stocks, it's true some of the best performing sectors have had a tough week, but all remain up for the year. And the S&P 500—the benchmark, is only 1.6 percent from its historic closing high.
When was that? Why, it was last Friday. Seems like a long time ago, no?
I said Wednesday the chances of a Fed rate hike in June were extremely small, and I still believe that. But the very low initial claims report for this week (262,000 vs. 290,000 expected) may be a sign that March's low nonfarm payroll report will be revised upward—which is certainly a requirement for the Fed to even consider a hike.
The Employment Cost Index, which measures the cost of labor for businesses, was up 0.7 percent quarter over quarter, better than an expected 0.6 percent increase. It rose 2.6 percent year-over-year, another sign of modest wage pressures. The dollar strengthened, and the 10-year Treasury yields rose on the news.
1) Energy has turned from loser to winner, while healthcare is flat. Energy, which was the loser for the year going into April, has turned into one of the gainers as oil went from $48 to $59 a barrel. Healthcare was the big gainer going into April, but a volatile month for biotech combined with some real down moves in other sectors. The iShares Nasdaq Biotechnology ETF is flat.
Sectors in April
Indeed it's not biotech that investors should be looking at; the bloom is off the rose for many sub-sectors of healthcare, including pharmacy benefits managers like CVS Health (down 2.3 percent for the month), HMOs like Health Net (down 11 percent), managed Medicaid providers like Molina (down 11 percent), and device makers like Medtronic (down 2.9 percent)
Much of this seems to be simple de-risking toward the end of the month. Healthcare as a group was the big winner this year and was a very long trade.
Rate hike in June? Forget about it.
I know, removing the statement that there would not be a rate hike in the next meeting theoretically still holds out the possibility there could be a hike in June.
But read the statement: this seems like a very small chance.
The Fed has told us when they will raise rates: 1) when it has seen further improvement in the labor market; and 2) when it is reasonably confident that inflation will move back to its 2 percent objective in the medium term.
In the statement, the Fed said that:
1) job gains have "moderated," economic growth "slowed," with growth in household spending declining and business' fixed investment softening, and repeated the housing recovery remains "slow;"
2) inflation is anticipated to remain low (below its 2 percent objective) for the near term.
In other words, the Fed has offered a fairly dovish (cautious) view of the economy, and inflation is also below its targets.
That sounds like a June rate hike is off the table.
Is there anything that could change this? We would have to have some bullish—and I mean really bullish—economic reports by now and the June 17 Fed meeting.
Specifically, April and May nonfarm payrolls would have to be up—big time. And March, which was a disappointment at 126,000, would have to be revised upward significantly.
We'd also likely need to see evidence that the rest of the economy is rebounding...that GDP is closer to, say, at least 2 to 2.5 percent rather than the 0.2 percent in the first quarter.
Finally, we'd need some darn fast moves up in the inflation indicators.
Doesn't this all seem a bit unlikely? I mean, I know the Fed loves to use the word "transitory factors" but betting on a June hike seems to be stretching credulity.
A strange morning of trading, with the German stock market down big (about 3 percent), German bunds rallying big, euro rallying big, oil rallying big.
The simple way to understand this is to know where the market is. In general, market participants are:
1) Long the dollar
2) Long Germany
The really weak economic numbers—particularly the disappointing GDP—implies those two trades could be coming a bit unwound:
Weak GDP = Fed is slower to raise = weaker dollar/higher euro = foreign exchange headwind for German exports = bad for German stock market.
The implication for stocks is that other long plays could be under pressure. What is the biggest gainer this year? Healthcare, in particular, biotech.
But biotech has been volatile. We have seen significant gains in other healthcare sectors this year, and that too is coming under some pressure. In the U.S. markets, we have a new route going on in healthcare, but not just biotech: Medical equipment makers like Stryker, labs like LabCorp, hospitals like Tenet, and HMOs like Cigna are all down 2-4 percent.
Of course, this doesn't explain everything. We also had a huge runup in German bund yields, up 12 basis points to yield 0.28 percent. The rally in yields began at the open in Europe and continued through the close. Traders blamed some of this on Jeff Gundlach's comments that he might make an amplified bet against German bunds. A German auction of five-year notes also did not go well.
What we need now is the Fed to put it all in perspective.
S&P futures were weaker ahead of the first quarter GDP report, dropped about 4 points immediately after and then bounced. That's a fairly modest response.
Bulls argue that a weak first quarter GDP—which showed the economy grew at just 0.2 percent—was well-telegraphed and that the question is to what extent we'll get a bounce back in the second quarter.
Peter Boockvar, chief market analyst at the Lindsey Group, this morning noted that hopes for 2 percent-type growth for the full year was still alive, but 3 percent was now highly unlikely.
What does this mean for the Fed meeting that concludes Wednesday? My bet is the members will recognize the weakness of the economy, but will say that many of the forces responsible for the poor showing—weather, low oil—will likely be "transitory."
The third factor, a strong dollar, may also be transitory if we continue to get these lousy numbers.