The Overnight Report: Computers Running Amok

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This story features CSL LIMITED, and other companies.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Back in Banks

The Australian market had stood somewhat idly by over the prior couple of sessions as Wall Street played panic stations one minute on trade war fears followed by euphoria on trade negotiations. But Wednesday night’s extraordinary “negotiation” turnaround – best represented by a 700 point Dow rally from pre-open low to closing bell – appeared to spur local investors into action yesterday.

Perhaps the market decided both the US and China had now fired off their heaviest artillery in the preamble of “How big’s your proverbial?”, and given both have indicated the desire to talk realistically, things could not get any worse from here, only better.

So perhaps a good time to buy some of those stocks or sectors that have been hardest hit of late.

Enter the banks. US banks joined in Wall Street’s rally on Wednesday night but yesterday’s 1.1% gain for the local sector represented both the biggest sector percentage gain and the biggest ASX200 points influence, with daylight second. Prior recent rebounds have been tepid.

Healthcare also turned around after recent weakness – the sector not being immune to global trade issues – and market darling CSL ((CSL)) chimed in to help healthcare up 0.6%.

IT has been dragged down in the vacuum of FANG, which in this case means A-for-Apple because Amazon is a consumer discretionary stock, but rebounded 1.1% yesterday. Consumer discretionary had a stand-out weak session on Wednesday, and rebounded 0.5% yesterday. (Having fallen -9% on Wednesday, Retail Food Group ((RGF)) jumped 10% yesterday for no reason. But the stock now trades in pennies.)

Telcos fell -0.6% as Telstra ((TLS)) remains unloved for all but the odd session, and the ACCC recommends the government break up the NBN.

I’d recommend they shut it down, endorse a public stoning of management (3pm Friday, bring your own rocks!) and outsource the job to someone who can deliver fast internet, maybe Slovakians or Uzbekistanis or someone.

Of course I’m only kidding about the stoning – we don’t have a stadium big enough.

Materials fell -0.6% on lower commodity prices, including gold, weaker exports data, and a weather-related production downgrade from lithium miner Orocobre ((ORE)), which led that stock to be the biggest ASX200 loser on the day with a -9.5% fall.

On the subject of weaker export data, Australia’s trade surplus was expected to ease back in February due to iron ore and coal prices coming off the boil but $825m, down from a revised $952m in January, was ahead of expectations. The difference was the offset provided by rural exports, which took economists by surprise and led to a flat export result. Imports rose 0.4%.

Economists would do well to tune into The Country Hour every now and again. Whether you want to eat them or wear them, the price of sheep has been hitting record levels in past months and it’s all about China.

Wall Street has kicked on with it again last night, ahead of tonight’s jobs report. The futures are up 18 points this morning, which would take us back through 5800.

Resistance?

Volume and Volatility

Legendary US investment billionaire Jack Vogle said last night he had “never seen anything like” the volatility on Wall Street experienced to date in 2018, while admitting he’s only been in the market for 66 years.

From the pre-open low (in futures terms) on Wednesday morning to the close of the physical last night, the Dow has rallied 1000 points. All because White House officials pointed out US-China trade is being “negotiated”.

But if Vogle is right, why is the VIX only at 18, when 20 is considered the level at which markets begin to indicate concern?

The answer is the VIX is a misleading indicator of true “volatility”. The VIX represents the demand for put option protection when investors become concerned about “crash” risk. If investors were piling into call options, the VIX would also rise. But markets never “crash” up, and investors never worry that they might. That’s why the VIX is called the “fear index”.

“True” volatility is market direction non-specific. Upside swings are equivalent to downside swings. In the first quarter of 2018, the S&P500 moved either up or down by 1% on 23 occasions. In all of 2017, such moves occurred only 8 times.

2017 was the year of “no volatility”, because Wall Street only went up. 2018 had been tipped to see a return to volatility, and so it has come to pass. Yet the old guard are still being left astonished.

So why these extraordinary swings and roundabouts?

Well, let’s consider that anyone who has been in the game for less than ten years, and at ten years you’re more veteran than greenhorn, has never experienced anything other than a rising market. A falling market? I don’t know what to do!

Let’s also consider that even though algorithms and high frequency trading were well established in 2008, the exponential advancement of processing speed, Big Data, clouds, software – whatever – makes 2018 today look like the Jurassic Era. Speeds are that much faster, and algorithms are that much more sophisticated.

It is that “sophistication” that brings the algos undone. The more sophisticated they become the dumber they get. Contradiction? As algos are programmed to respond to more and more esoteric inputs, such news stories, the more they need a filter of human common sense to understand just what they’re doing. But they don’t have that.

What has been most notable about this past week on Wall Street has been the volatility. What has been next most notable is the complete lack of volume. The instos are standing aside. The kids have been pumped up on red cordial and released into the playground while the parents look on from outside the fence. They watch the kids going nuts, thinking “someone could lose an eye”.

Here endeth the lesson.

Commodities

The prices of aluminium, copper and nickel have moved by one percent every night for the past few sessions. The only difference last night is they all headed in the same direction.

Iron ore is unchanged with China on Holiday.

Gold continues to slip back as fear subsides, and as the US dollar index rises 0.3%.

Which has helped the Aussie down 0.4% to US$0.7683.

Today

The SPI Overnight closed up 18 points or 0.3%.

China is closed again today.

US jobs report tonight.

Rudi will connect with Sky News Business via Skype at around 11am to discuss market madness, and maybe some broker calls too.

The Australian share market over the past thirty days…

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