With stock prices at levels some see as not justified by the fundamentals, there may be a rough road ahead.
One of the bigger conversations last week on Wall Street, amid comparatively light trading volume, was a HSBC research note suggesting the equity market was ripe for a big sell-off.
In a piece published last Wednesday, which echoed the bank’s bearish sentiment expressed in a September 30 report, the bank’s analysts issued an ‘orange alert’, indicating the current stock market chart patterns for the Dow Jones Index closely resemble those of 1987 ahead of the infamous ‘Black Monday’ crash.
“The possibility of a severe fall in the stock market is now very high,” the analysts warned in the note. The note triggered selling which only proved to exacerbate the notion the market was ready to give back some its gains, prompting the bank to upgrade its warning alert to red.
HSBC said that the market’s “head and shoulders” shape indicates an absolute market top for prices and signifies the time to sell. The note points to 17,992 points for the DJIA and 2,116 points for the S&P 500 as the “critical pivot points to watch for signs of a broader capitulation.”
Trading on U.S. equity exchanges averaged 6.21 billion shares per day for the week ended October 14, according to Bats Global Markets data. That’s down from an average of 6.89 billion shares in the week ending October 7.
“We’re being careful with adding new positions ahead of the Fed and now this report,” said a trader on the NYSE. “The market already felt kind of ‘toppy’ and with supply still limited, prices really can only move up. But that momentum can only hold so long.”
In trading news, two of the bulge bracket brokers – Citi and Deutsche Bank – introduced new trading tools targeting the buy-side and their liquidity needs.
First, Citi announced it was launching its Citi its rebranded its Liquifi ATS i- CitiBLOC – as an alternative trading system designed for block execution.
According to Citi, the platform leverages conditional orders to seek block execution while minimizing the opportunity cost typically associated with trading blocks of stocks. It is designed to only accept auto firm-ups, and has a nearly 90% normalized firm-up rate.
CitiBLOC accepts conditional buy and sell orders and sends an invitation to firm-up to each of the participants when there is a potential match. It has a unique rank, time matching priority. Rank is determined by a combination of firm-up rate and size of firm-up orders. A minimum size of 5,000 shares or a notional value of at least US$100,000 is required per order.
German-based Deutsche Bank announced its Liquidity Dashboard trading application, which is designed to help institutional traders locate so-called “inaccessible liquidity.” This type of liquidity, according to Bryan Fagen, the firm’s head of execution strategy in equities is primarily located in the retail/wholesaler market and is never offered to big firms.
Inaccessible liquidity, as Fagen sees it, constitutes almost 20% of market volume that is not in the dark pools or registered ATS. In comparison, Deutsche Bank reports that 65% of market liquidity rests on the exchanges and 15% in dark pools.
Liquidity Dashboard takes a trader’s desired percentage of daily volume target for a stock and breaks down just where the symbol is and then offers suggestions on how to adjust trading tools to find it.
This Week’s U.S. Economic Indicators of Interest:
| Monday | Industrial Production Capacity Utilization Fed’s Stanley Fischer Speaks |
| Tuesday | Redbook Retail Sales Consumer Price Index
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| Wednesday | Housing Starts Beige Book |
| Thursday | Jobless Claims Philadelphia Fed Survey Fed’s William Dudley Speaks Existing Home Sales Leading Economic Indicators |
| Friday |
No Data Scheduled |
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