Monday, August 31, 2009

The market tests the momentum

The Shanghai composite closed down over 6% today, and down 21.8% for August to close at 2668. China giveth, China taketh away!

Barron's this weekend had a story on AQR Capital Management, who manages about $20 billion for institutions. You only need to read two paragraphs of that story to understand their approach to today's markets:

You employ about 200 people. But none of them do fundamental research and follow companies like General Electric or Nestlé, right?

Asness: It's actually just me and David and one really big computer . This comes up all the time. We don't have analysts who cover each of the individual companies. We don't visit companies. A lot of what we do is asset-allocation work. To the extent that we visit countries, it's usually called vacation.

And then, you need to read two sentences to understand their approach of emerging markets:

How do your models view the emerging markets now?

Asness: We are shorting most of the BRIC markets [Brazil, Russia, India, China] against some of the boring emerging markets like Taiwan and Korea. The BRICs are expensive. We do also look at momentum. China is just too expensive to overcome the positive momentum.

Everyone underinvested, hopes that the cracks in China could presage a crack in momentum. That's why traders are nervous about today's market. The so called "trash momentum" stocks, FNM, FRE, AIG and C were endlessly bashed this weekend, because they are a proxy on the animal spirits of the speculator.

Supposedly, the bear thesis is, that the only thing holding this market up is momentum. And that's because the bears know how the quants trade. You don't need an algorithm to tell you what they are doing; you just need to read Barron's!

Which is why we had such a concerted effort to crack the momentum; because if we crack the momentum, then you can crack these traders algorithms! Who needs Sergey?

And that's today's game.

We'll see how the market takes this pounding.


Anonymous said...

I've read so many articles on yahoo front page that was bashing AIG, FNM,FRE! Someone has an interest in trying to scare people out of these stocks.

Is our entire market really reduced to algo super computer trading??? No wonder I'm finding so many cheap stocks, everyone is too damn lazy to do some good ole research!

Anonymous said...

How are you playing AIG?

Sep calls or a few months out like Nov/Jan?


Palmoni said...

I'm playing the Sept calls and trading them. Great action but you have to be quick.

We'll see how long this bashing lasts; I just don't think the market is going to crack when the whole world is set up for the pullback.

Anonymous said...

Palmoni, I'm down a buck on FACT, what do you recommend?

Palmoni said...

I'd sit with it. Remember they only put out $10 million--the rest is milestone payments.

Just real sloppy action everywhere today

Anonymous said...

What's with the volume on C? We getting over 1 billion shares exchanging hands on a daily basis!

I doubt that is from day traders, you think big money is moving in this name?

Jay said...

Citi has been trading a billion shares daily for weeks now. The big boys are loading up.

Anonymous said...

I wonder how much longer it'll be until the sellers in C have finished!

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