Trader’s Narrative

I use Interactive Brokers as my primary broker because of their price and offering but also because they consistently improve and add new features. They put the Japanese companies to shame when it comes to kaizen.

Usually they follow the requests made by their clients - I’ve been with them long enough to remember a time they grudgingly gave in to demands for trailing stop losses because Thomas Peterffy believed they weren’t good for the health of markets (I am not kidding!!). But they also innovate and surprise their fans with new features.

They recently announced a raft of new features, products and markets. If you are a serious trader and looking for a broker, check them out.

Here are the recent additions:

New Products & Markets

• US Treasury Bonds and Notes
• Vanguard No-load Mutual Funds
• Mexican stocks, futures, and options
• Spanish stocks

The first two are huge news because as far as I can remember, we’ve been pestering IB for it. The even better news is that fixed income will be expanded soon to include T-Bills and that other mutual fund families will be added as well. IB was at one time proud that they stuck to just derivatives and equity markets. Finally, they are branching out to other financial products.

The expansion to Mexico and Spain are also welcomed. Especially since I have familiarity and interest in the Spanish equity market. IB has offered Spanish derivatives for some time but now the lineup is complete.

IB Block Desk
The biggest news is this! Interactive Brokers is opening up their institution block desk to retail customers. Now if your orders are big enough (100+ contracts), you can call them up and get a tighter spread or more liquidity than electronic markets. The desk also offers you access to the Spoos (the S&P 500 open outcry market or pit), OEX, NDX (and their options).

Answering calls will be experienced, knowledgeable traders who can tackle anything you throw at them, including complex derivative trades. But this is a very surprising development since Interactive Brokers has adamantly refused to do anything but push deeper into electronic markets through sophisticated trade matching computer algorithms.

IB Risk Navigator
This is a relatively new built in quantitative tool that will monitor and manage your risk exposure across countries, markets, currencies and securities. Think of it as your very own risk manager. IB has added a few extra capabilities to it but unless you trade a gamut of securities spanning markets or dabble in options heavily, then you probably don’t need it. In case you’re interested, IB is offering two Webinars to explain it in more detail: March 26th and April 23rd.

Trader Work Station
The TWS is the trading platform from IB and most people fall into two camps: they either love its simplicity or hate its clunky look (and Java-ness). In any case, IB isn’t going to chuck it any time soon so if you’re thinking of opening an account with IB this may be the only deal breaker. You can always use their web based interface but it has very limited functionality compared to the TWS. IB has finally tried to mollify its critics by adding skinning, so you can customize the look of the TWS.

I can’t help but think that a lot of these uncharacteristic new features and markets are a result of Interactive Brokers becoming a public entity last year.

If you’re shopping for a broker, click to see last year’s best broker ratings from Barron’s.

So was that capitulation? I don’t mean today’s gangbusters market. I mean yesterday’s rollercoaster ride.

Let’s see…

Stop, Hammer Time!
The intraday reversal gave us a beautiful, textbook hammer candlestick. Using the traditional Japanese candlestick theory, after a downtrend this is a portent of the end of selling pressure. Although the low could be tested - especially with Friday’s gap - a hammer is a bull’s friend.

Market Internals
The market was deeply oversold. The NYSE cumulative intraday TICK reached levels only seen right after September 11, 2001 and during the bear market bottom in the summer of 2002.

The New High Lows Index for Nasdaq reached 2.29%. Simply put, almost no highs, and almost all lows. To find a more extreme reading, we’d have to go back to the fall of 1998. Which as you know was a major market bottom.

Only 9.4% of the stocks in the S&P 500 index closed above their 50 day moving average. And only 34% above their 200 day moving average. The NYSE McClellan Summation index got as low as it has been since the bear market bottom.

My Kingdom For T-Bills
During Thursday’s nail biter of a session there was an exodus from anything risky towards the least risky asset. Theoretically risk free Treasury Bills. The run on government paper pushed the yield down to 3.86% for 3 month bills. To make things worse, due to an unexpected rise in tax receipts the government issued less paper. This sudden imbalance is extremely rare. And it only happens during panics (which… say it with me now… form bottoms).

I felt uncomfortable agreeing with Cramer, but I think this is one of the reasons why the Fed acted this morning. Commercial paper was being shunned. They stood up and basically told the market We got your back. For a bit it was touch and go, but my world feels right as rain again.

Margin Bulletin
I got a message from my broker warning me that positions in VIX futures and futures spreads could face an increase in margin from the CFE. I’m thankful for the headsup but I don’t trade these securities. I did notice that margin tweaking is a sign of inflection points. Just something to tuck under the hat.

Retail & Institutional Fund Flows
This is fascinating. According to the estimates from TrimTabs, we just had the highest weekly outflow since right after September 11, 2001. For about two years now the US mutual fund investor has been shunning the US stock market. But this week they pulled $12.8 billion out of US equity mutual funds.

According to TrimTabs, since the beginning of year, mutual fund buyers have been net sellers of stocks resulting in outflows of $35 billion in the last 4 months. The only time we saw similar outflows of this magnitude was during June 2002 and September 2002. You know what that was, right?

Strangely enough, bonds are the most popular asset class along with money market funds. They are even more loved than international markets. Bonds have seen an estimated $92 billion inflow since beginning of year this year.

That’s the retail side. What about the institutional mutual fund asset allocators? I’ll give you one guess.

They’ve been diving into the US market with the same intensity as the retail side has been escaping from it. So the smart money is buying and the emotional, dumb money is selling. Watch the video for more details:

Commitment of Traders
The most recent COT report dovetails with the fund flows data. We are seeing a continuation of the commercials going huge net long and the small speculator going the other way. Whether the futures market or the stock market, the two sides have clearly outlined their positions. There is no doubt where they stand.

What, Me Worry?
Which gives me a possible explanation for the sentiment picture. Perhaps the reason we are not seeing a total all out panic and despair from the retail investors during this downturn is that they simply don’t have any real vested interest in the outcome.

If we go by the COT and fund flows, they have very very few chips on the table. So why would they care? why would they get scared? Most of their money is squirreled away in cash equivalent and bonds and international markets. Unlike the 2000 top, they have very little invested in the US. Why would they even really care if the US market ticks up or down a few percentage points?

The yield curve is a sign of liquidity and as such, has provided good signposts for the long term prospects of the stock market. So lets take a look at what the yield curve looked like at the top and bottom of the markets. And what it says now.

The first chart shows the yield curve. The first line (burgundy) in the chart is the flat to negative yield curve we saw at the market top in March 2000. The other line (red) is the very positive sloping yield curve we saw at the bottom of the bear market in March 2003 (there was a temporary suspension of 30 year bond auctions during that time which is why you don’t see data for that security).

And now, we are once again seeing a flat to negative yield curve similar to the 2000 top (not shown on graph). Does this mean that the market is in trouble?

Maybe. But not necessarily.

You have to remember that the Federal Reserve, unlike the myth they like to perpetuate, doesn’t really control anything. Instead, they do their best to mimic the dictates of the bond market.

The short term, 90 day bond rate bottomed in the summer of 2003 and rallied almost non-stop. But beginning last year and continuing this year, it has put in a beautiful rounded top formation. And just recently the 90 day T-Bills rate carved a triple top and then fell through support at 4.75%.

This is the largest discrepancy between it and the Fed funds rate since right after September 11, 2001. The clear message of the bond market is a Fed rate cut.

Which would will reshape the yield curve to once again be positively sloped.