Archive for November, 2011
Since the Ocotber 27th high of 1289.25 and the November 1 low of 1208.50, the market has been a chopfest. Although I am not a big fan of trendlines, the rising wedge off of these levels is hard to ignore.
At this time, we are creeping closer to the lower end of the wedge and a break below 1208.50 could trigger a quick selloff to 1156.50. Take a peek at the charts of many of the top stocks in the SP 500 index and you will see a familar chart pattern. Mulitple double and triple tops followed by a series of lower lows. With the top dog of the bunch AAPL struggling after its last earnings report, one starts to wonder what will be the next impetus to send the market back to its recent high. Also keep in mind the “Johnny come lately” fund managers that puked at the bottom and scrambled to re-enter, will be the first ones to jump ship on a breakdown. Furthermore, have the masterminds in Europe really come to a solution to their problems? Seems to me that there is really no solution to that mess and once one country’s problems are supposed to be solved, some other country may have similar problems.
On the other hand, you can never underestimate this market and a rally above 1289.25 would signal a move to the yearly high around 1350. It would certainly be a nice way to pad the year end bonuses on Wall Street. A few weeks ago, Goldman Sachs set the yearly target of the SP 500 Index at 1200 and have not wavered from that prediction during the recent rally. Lets keep a close eye on the aforementioned levels and see which way this fairly reliable technical formation is resloved.
Representative, Peter DeFazio is at it again. With support from Senator Tom Harkin, the two US lawmakers will introduce a bill today to propose a transaction tax on financial transactions. (See Bloomberg article here).
DeFazio tried to propose a similar tax a couple of years ago, but the proposed bill never gained much traction. But now that the European Union has proposed a financial transaction tax, DeFazio is hoping that his proposal can gain more support this time around.
The problem is this tax, while in theory, would raise a substantial amount of revenue, it would come with some substantial costs, the most significant being a decline in market liquidity. Market liquidity refers to a stock’s ability to be sold without substantially impacting price. The majority of our market liquidity is provided by market makers. These market makers have very small profit margins. A modest transaction tax of 0.03 percent (which is being proposed), would have devastating effects on the market making business. Let’s take a quick look at the math.
Many of our most highly traded stocks have bid-ask spreads of one cent. A stock that is trading at $25, would have a transaction tax of ($25 x 0.0003) = $0.0075 per share. If a market maker were to buy this stock at $25 and sell it at $25.01. They would make 1 cent/share, but would have to pay 1.5 cents/share in tax (they have two transactions, the buy and the sell). Therefore they would lose 0.5 cents on the transaction. In order to remain profitable they would have to widen their spreads to a minimum of 2 cents, and possibly further (as market makers aren’t always profitable on every trade). Wider spreads means more price impact for institutional traders as they make trades, which comes right out of the pocket of the little guy who invests in the fund that is trying to transact. These are the indirect costs.
The direct cost is that the institution transacting would have to pay the transaction tax as well. So another 0.03 percent comes out of the pocket of the individual investors investing in the fund, every time the institution makes a trade.
What will naturally happen is that traders and institutions won’t trade as much, and volumes will drop substantially. This makes any projected revenue raised by the transaction tax much less than what would be raised on today’s current market volumes.
Some will argue that introducing this tax will eliminate high frequency trading. Now I’m not a big fan of high frequency trading either, but there are better ways to regulate high frequency trading. This tax would do nothing more than harm market liquidity in a market environment that some already argue doesn’t have enough liquidity to begin with (think of the May 6th flash crash).
So let’s use some common sense when introducing bills that do more harm than good.