Here's what traders are watching as we get closer to the first presidential debate on Monday. » Read More
Hope you've all seen some of CNBC's cool coverage on the space program this week. Take a look here if you haven't.
It's a good opportunity to highlight the Kensho New Economy Indices, 13 sectors (16 indices) designed to highlight disruptive technologies such as drones, robotics, cyber security, 3-D printing, nanotechnology as well as TWO space indices.
You can see them here: http://www.cnbc.com/kensho/
And my story on the indexes here: http://cnb.cx/2bGKSn6
The Kensho Space Index is at a new high (though it only goes back to 2014), and consists of 30 stocks with significant exposure to the space industry. Every wonder who builds all the stuff that goes into the space program? Of course it includes companies like Boeing and Honeywell and Lockheed Martin, but there's dozens of smaller companies that make rocket parts and mundane things like filtration and fluid control systems. And who actually delivers the groceries to the International Space Station (ISS)?
On the surface, it's been nothing short of awful this year. Only 59 initial public offerings have priced, that's about half what it normally would be.
"The IPO market is half a heartbeat away from getting out the paddles," David Menlow of IPOfinancial.com quipped.
But IPO watchers are hopeful that the fall will see a flurry of activity, for three reasons:
Despite the dearth of IPOs, the returns on what has gone public have been improving. After lagging most of the year, the Renaissance Capital IPO ETF, a basket of the 60 most recent, largest IPOs, is up 8.3 percent this quarter, outperforming the S&P's 6.8 percent gain.
Bottom line: The IPO market has been lousy for issuers, but it's been improving for investors.
What are investors clamoring for in IPOs this fall? What they want is growth. Remember, this is an era where a lot of companies are growing earnings through financial engineering like buybacks but have no real revenue growth. Companies with revenue growth are in demand.
You can see this in the IPOs that have done best so far this year:
All tech companies, all with growth.
Let's look at IPO hopefuls for the second half. There is not much on the calendar, but there are roughly 100 companies that have filed a public S-1 statement and could go public fairly quickly.
Growth can be found in two sectors: technology and consumer.
So far, Yellen and Fischer are playing "good cop, bad cop" very well.
In a speech on the Fed's "toolkit," Yellen devoted only three brief paragraphs to the current economic outlook. The key sentence is here: "Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months."
But Janet Yellen cannot help but be, well, Janet Yellen. She immediately hedged this comment with other, dilutive statements:
"Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook."
"...the range of reasonably likely outcomes for the federal funds rate is quite wide..."
"...the economic outlook is uncertain, and so monetary policy is not on a preset course."
What's this all mean? Yellen clearly implied that every meeting is still live, but she did not tip her hat enough to indicate that September is any more likely than before her speech.
Calling all stock market geeks: did you ever have an idea for a trading program? There's a firm who wants to hear from you.
Quantopian recently made headlines when it announced that it had received a $250 million investment from Steve Cohen's Point72 family home office.
The purpose: to put capital behind people writing trading algorithms.
Sound silly? It's not. The world's biggest traders are on a desperate hunt for the scarcest of all creatures: alpha. Outperformance. And some think they can find it by making trading tools available to the public and seeing what kind of potential trading geniuses emerge.
Call it crowd-sourcing for algorithmic trading.
There seems to be crowds. Quantopian claims they have 90,000 people on their trading platform.
How does it work? Let's say you're a value investor. You want to use multiple balance sheet items to calculate a score for a company. Using Quantopian's data base, you could do that for all the companies in, say, the S&P 500, and then rank them. Maybe you want to test a program where you go long the top 10 names and short the bottom 10.
Or maybe you're interested in pairs trading... buying or selling two securities at the same time. You do a search for securities that statistically trade together. You set up an algorithm to track them and when the spreads between them change (if stock A is higher and stock B is lower, you short A and go long B, or vice versa).
The pairs trading is a particularly good example of the use of automation. The spreads between the pair of stocks will move throughout the day and the program can monitor that in real time.
These are simple examples, but you get the idea. From there, you can back-test the idea to see if the trade has any statistical validity.
If it does, you can take the next step. Quantopian will allow you to connect to a brokerage account (Robinhood or Interactive Brokers), where you can place orders and do transactions.
Here's where it gets interesting. Even though you own the intellectual property that is the algorithm, Quantopian is monitoring all the algorithms. If they like what they see, they may make an offer to put it into their portfolio and pay you a share of the returns it generates.
That's where Steve Cohen comes in. That $250 million is going to be used to buy into algorithms that are working.
Quantopian started trading small sums of its own money late last year (though they are NOT a hedge fund), but the $250 million from Cohen is its first significant investment from an outsider. They will begin putting that money to work in January.
It's all a great idea — in theory. Will it work? Older traders will remember the day traders who got killed by the market 15 years ago. Many hedge fund friends scoff at the idea of "quant do-it-yourselfers."
Fawcett says this is different, that access to the same massive computing power that hedge funds and mutual funds have access to greatly levels the playing field.
"What we're doing is taking the multi-manager model and completely automating it. Instead of multi-managers, we have multi-algorithms," CEO John Fawcett told me during a visit to the NYSE today.
Fawcett passionately believes that this is the future of trading. Hedge funds — and even mutual funds — will no longer be able to charge exorbitant fees for strategies that can be easily automated.
"Your strategy will either be commodified into an ETF or you will find some way to really differentiate yourself," he says.
The way to get differentiated is through quantitative analysis using big data and machine learning.
"It's no longer feasible for a human to analyze all the data we are receiving," he explained. The explosion of new data makes it impossible to pick out patterns without the help of computers.
The problem is that there is still a limited number of people who can analyze the data. "A data scientist is the job descriptor everyone wants, in all sectors of the economy," Fawcett said.
That's why companies like Quantopian are scouring the earth for talent. The dream is to find the next genius who might have ended up working at (or founding) the next Citadel or Renaissance.
They're not the only ones looking for talent. Citadel recently hired Kevin Turner, Microsoft's chief operating officer, to run its securities arm. Bridgewater, the world's biggest hedge fund manager, had already hired David Ferrucci — the man behind IBM's Watson — to run its new artificial intelligence unit.
Where is all this going? Right now, people are writing algorithms, but it seems to me there's clearly an end-game to all of this: machines writing algorithms. Independent of human input. Machines trading with machines.
Fawcett smiles when I say this. "We're at least 10 to 15 years from that happening, in my opinion."
But he didn't say I was crazy.
It's been a year since the Aug. 24 "mini flash crash," when the Dow sank more than 1,000 points at the open.
While there was a fundamental reason for the skid — the sudden devaluation of the Chinese yuan —the drop was exacerbated by several problems with the way stocks trade.
It was a day characterized by 1,278 trading halts that caused considerable problems in the opening minutes of trade.
Fast-forward to June 24, 2016, the day the Brexit vote was announced : another market surprise — another big-volume, big-volatility day. The Dow also opened down, though only about 600 points.
Except this time, there were only 68 trading halts.
Two big, surprising events that caught traders by surprise — with one, 1,278 trading halts, the other, 68 trading halts.
It's not an accident. In the last several months, market participants, but particularly the major exchanges (BATS, ICE/NYSE, and Nasdaq) have made some headway toward making markets function more smoothly when they are under a lot of stress. And they are considering more changes.
There has been progress in two key areas:
1.) Reducing delays in opening stocks. The basic idea is simple: Stocks should open as quickly as possible. Only about half of S&P 500 stocks were opened on the NYSE by 9:35 a.m. on Aug. 24. This caused difficulties getting a correct price for the S&P 500 and for ETFs as well.
What has the industry done? In July 2016, the NYSE issued new rules that permit more NYSE stocks to open "automated," that is, without having a designated market maker manually open the stock, though they retain the discretion to open stocks manually if warranted.
On Brexit day (June 24), the vast majority of NYSE stocks opened promptly. That drastically reduced the problems with pricing ETFs and major indexes that occurred last Aug 24.
2) Reducing trading halts. Remember that stat from above: Even after stocks opened on Aug. 24, there were 1,278 trading halts for 471 different ETFs and stocks.
After the 2010 Flash Crash, the entire industry created individual stock circuit breakers, known as "limit up, limit down" that halt trading in individual stocks for five minutes when they move more than 5 percent in a rolling five-minute period (the band is widened to 10 percent in the first 15 minutes of trading).
These circuit breakers have worked well, but the extreme number of halts that day caused many to consider whether there were "tweaks" that would reduce the number of halts.
Without getting too complicated, they have changed how they reference the price for how the trading bands are calculated. Since the implementation, there has been an approximately 75 percent reduction in trading pauses, according to the NYSE.
Market participants are looking at other tweaks to the limit up, limit down system. The basic idea is to keep stocks open and avoid halting them. Here's one idea floating around: Don't halt stocks at all, just create trading "pauses." If a stock trades down 10 percent, let's say from $100 to $90, let it stay there for some period of time, say four minutes. During that time, it can trade at $90 or above, but not below. If after four minutes it doesn't move off of $90, don't halt the stock, just re-adjust the bands. Now it has to trade down another 10 percent before it can be "paused."
But I'm getting ahead of myself. A week and a half ago, the exchanges issued a rare joint press release to announce some of the changes they are seeking. You can read it here.
Bottom line: None of this means that the market can't go down. But it does mean that "market structure" might be less of a factor in causing problems than it has in the past during volatile periods.
August markets: Beneath the summer doldrums, markets remain strong. I know — the narrow trading range, low volatility and light volume make it hard to concentrate.
August, traditionally one of the weakest months of the year, is up fractionally. Call it the election year effect, if you want.
I prefer to attribute it to healthy market rotation.
Clinton appears to have edged out Trump in the presidential debate, based on analysts' take on the market reaction.
Donald Trump got sidetracked too often in the first debate and missed two opportunities to score major debate points, says Jake Novak.
The Mexican peso reversed losses against the U.S. dollar amid the presidential debate.