What Is Causing the Wild Intraday Swings?

What is causing the wild intraday swings? Professional traders, who make their living going long and short baskets of stocks, feel like they have a wobbly bowling alley installed in their brains. Every single strategy seems to be losing.

Some thoughts:

1) It's the machines!

High frequency traders make more money in high volatility markets because most use statistical arbitrage strategies that benefit from volatility. High frequency traders have definitely made good money in August and September.

They benefit from volatility, but that is not the same as causing volatility. Think about it. If they could flip a switch and cause volatility at any time, why wouldn't they do it all the time? There was almost no volatility from September 2010 through the end of July this year...high frequency traders were not doing great during this period.

2) It's inverse/leveraged ETFs! I wrote about this a month ago...I too have had suspicions about these instruments (I am a big backer of plain-vanilla ETFs), but the amount of money in these leveraged ETFs is small, and the best studies I have seen indicate they are only a fraction of the trading volume in the last hour.

Let's look at some other factors:

1) End of the quarter. There has been considerable discussion about the enormous outperformance of bonds to stocks this quarter and this month, with many pension funds likely trying to rebalance this week. This may have been a factor today, but the macro trend is clearly more important.

2) Permabears. Have you noticed that everyone on Wall Street is bearish, and who can blame them?

"Political fighting, budget, political uncertainty, Euro, market volatility … has pushed a number of folks to cash out of equities," one trader wrote to me.

We've been chopping around in the same range for two months now. We find buyers in low 1100s in the S&P 500, and sellers in the high 1100s. "Caution to anyone who buys this market in the high 1100s," one trader wrote to me at the close.

3) Mutual funds and long only funds are still seeing redemptions. ETFs are holding on. But with ETFs, look what you get: really high correlations. You're not going long Apple and short IBM ...they're all going up or down at the same time as folks buy or sell the ETFs on any given day.

"You wind up with much more volatility as you jump in and jump out — I want risk on or get me the hell out of here," one trader said.

Bottom line: it's a trading market, not an investing market.

4) Volatility remains high. We did 4.5 billion shares on the NYSE consolidated tape today...higher than normal but anemic compared to the volatility. Not only is the front-month VIX contract high at 39, VIX futures going into November are even above 35! That tells you guys who are taking the other side of all this put buying think the markets will be choppy.

Finally, if you really want to blame something, has anyone noticed that this recent volatility all started in the beginning of August, when S&P downgraded U.S. debt . That's when it all this craziness started. I'm not blaming it all on that, but look at the charts...look at the Volatility Index! It went from the low 20s to almost 50 in a week!

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