new era of efficient markets pushing stocks upward

Discussion in 'Trading' started by silk, May 18, 2007.

  1. silk

    silk

    The matrix of liquidity created by this new era of efficient market trading is pushing stocks higher and higher. The risk premium has rightfully decreased.

    All of the stocks/sectors/and global markets are so interconnected/arbed/pairtraded that it has created a level of liquidity not dreamed of 10,5, or even 3 years ago.

    For example, take a small oil stock on the NYSE. Its stock price is now determined moment by moment by the price of XLE, OIH, XOM, SPY, FTSE, NIKKEI and arbed down to the penny. The price of this stock can't really deviate much from its correlated indexes. If it does black boxes swoop in to provide liquidity. More importantly, sellers and buyers of stocks understand this and trade accordingly and trade orderly in a manner so as to not get a bad fill versus the correlated indexes. No one buys 5k shares 10 cents away from market anymore when they know they can buy 500 shares 1 cent a way from market 10 times instead.

    A degree of risk that used to be present when long is now gone. There is always a buyer of every stock and more importantly you can count on other sellers to not sell in a stupid way.

    This makes a small cap stock almost as safe as a large cap. Often i see XOM moving more than some smaller names which is quite ironic. 5 years ago this was not the case and there was insane unexplained volatiitly in small cap names because of illiquidity. Now the market for these names is orderly and arbed down to the penny against the various indexes ect.
     
  2. "Stocks have reached what looks like a permanently high plateau." --Irving Fisher, Professor of Economics, Yale University, 1929.
     
  3. Classic quote!! This time it is different!!!!!
     
  4. True that
     
  5. silk,

    But what is really the root cause of this "efficiency"?

    Will it behave the same way during a bear market or extended decline?

    One theory I have is that prices just 'seem' more efficient because prices are at very lofty levels and buyers are in no rush to buy but due to current conditions are in no hurry to sell either, producing zero volatility.

    The small caps' collapse in volatility relative to large caps, sure is surprising though!

    And which players/strategies are best in this environment besides being a long term bag holder?
     
  6. Wait until liquidity is tightened.

    And yes, its inevitable.

    In the near future, US and World markets will wake up to the near double digit inflation happening now.

    At that point, employees will demand wage increases en masse and the inflationary trap will begin.

    The only way out of that - tighten rates.

    The reason we haven't seen it yet - jimmyed CPI stats disconnect wage earners from reality.

    By keeping wage earners in the dark as to True Inflation, the secondary trigger needed to jump start the inflationary trap is suppressed. Temporarily..

    A lot of psychological manipulation happening now to prop the econ.
     
  7. I don't know when we we will have the next 5%, 10%, 15%, 20% or greater correction, but we will have them.

    Only fools ignore the inevitability of historical patterns.
     
  8. Toma0926

    Toma0926

    I don't think the average wage earner refers to CPI stats to evaluate their buying power.
     
  9. I only see one pattern right now: We keep making new highs. Once we break lows it's time to modify your portfolio, until then.. enjoy the ride!!!
     
  10. Would you invest/buy into index linked ETFs at the moment, like spyders or diamonds?

    Do they offer good value at the mo?

    Thanks,

    Dackster.
     
    #10     May 19, 2007