Selling stampede:The average holding period for a stock is rising, according to US economics professor Michael Hudson – to 22 seconds, up from 20 in 2009. Foreign currency “investments” typically last just 30 seconds.
How come? Because of computer-driven high-frequency trading, which is estimated to account for up to 70 per cent of market activity in the US and 77 per cent in the UK.
High-frequency trading is as noteworthy for its unfilled orders as its hyperactive trading, however. Themis Trading’s Joe Saluzzi, a fierce critic, alleges that orders only execute 5 per cent of the time, with 95 per cent of orders quickly cancelled. This so-called quote stuffing creates a false impression of demand.
Saluzzi’s figures are not backed up, but a recent academic study did confirm that quote stuffing is “pervasive” on stock exchanges.
Acclaimed contrarian investor and author David Dreman is also appalled by high-frequency trading. “If other brokers see a selling stampede bearing down on them, they are likely to escape being trampled by selling their positions pronto,” he says.
So how can investors and traders protect themselves from this “dark vulture”? Use limit orders and avoid both market orders and stop-loss orders, Dreman recommends.
Bubble in China:GMO, the firm co-founded by legendary investor Jeremy Grantham, is famous for identifying bubbles. At a recent research symposium in London, GMO’s Edward Chancellor cited 10 characteristics of a great mania.
The main ones will be familiar to Irish people: a growth story that is uncritically accepted; overconfidence in authorities; easy money; an investment boom and misallocation of capital; collective irrationality and herd behaviour; fraud and Ponzi financing; conspicuous consumption; and valuations.
The obvious bubble today is in Chinese property, said Chancellor. Housing is worth more than four times Chinese GDP. That’s extreme, with only the earlier Irish and Japanese housing bubbles comparing.
Chinese housing concerns are not new. The Chinese stock market has lost a third of its value over the last two years, making it the worst performer among the world’s 10 biggest markets.
Market titbits: While the SP 500 remains below its 2011 highs, the Nasdaq 100 recently hit a 10-year high. However, investors who bought at its peak in March 2000 are still nursing losses of nearly 50 per cent.
Brent crude has been trading around $110 of late, well below its $145 high in 2008. The decline in the euro, however, means 2012 prices are approaching that record high (€86 compared to €92 in 2008). Gold has enjoyed a double- digit bounce since falling to its 300-day moving average last month. The same support held on 10 out of 10 occasions between 2001 and 2007.