Follow up

This is a follow up to the "Tick tock" post from a few days ago. More evidence is pouring in regarding extreme market inconsistencies. Accoring to data directly obtained from the NYSE Goldman Sachs has become the only force left in the game. Their program trades have accounted for 1/3 of ALL program trades in the entire market, that's 850 million shares PER DAY just for GS! Furthermore their principal trades are 81% of all of these trades. Principal trades are trades for GS and not for a client. To put things in perspective GS is trading more shares per day than all of the other top 15 brokers COMBINED!

Couple this fact with the continuation of the dissappearing market liquidity and this trend will not end anytime soon.

According to a report from Matt Rothman of Lehman, this rally has been a historic outlier. He writes "The previous rally was driven primarily by beaten down, cheap, low priced stocks of questionable quality. An equally weighted portfolio of stocks that had prices under $5 as of close on March 9th had generated a positive return of 128.5% through April 17th, outperforming Russell 1000 by almost 2.5 times (Russell 1000 return for the same period was up 52.6%). Similarly, an equally weighted portfolio of 100 stocks with the lowest Market Sentiment score as of March 9th, yielded 116.7% during the same period."

This market has been stretched like a rubber band. One could put together a pretty compelling case that GS has been intentionally raising the prices of the most shorted (and worst companies) stock since the bottom at 666. Through this process they have managed to force several large quants to deleverage (cover their short positions) which has raised these prices on the shitty stocks forcing more quants to deleverage. A continuing process. Their goal would be to seemingly drive the competition from the market and of course profit along the way.

The tape over the last 5+ weeks shows a series of fairly significant quick ups and downs. The trend only seems to last for one or two days. What this looks like to me is a repeat of a sell-off based mostly on short selling, then buying by the "buy the dips" crowd (and apparently GS). This buying forces all of the shorts to cover which forces prices higher until the bears try to pick another top.

Ultimately this process will end. Once all of the quants have deleveraged and all of the bears finish trying to pick the top and all of the "buy the dips" crowd has gone in on stocks this will top. When it does we are set up for what could be one of the worst drops in market history.

I have no idea how long this plays out. The evidence already shows distribution by the institutional players (GS?). They may be getting ready for a fall. However this could strecth on for another couple of weeks.