Play the Players

The bears are on the prowl during this mid-vacation-season.

While the second team is in charge, trading volume of all stocks typically declines a bit. Yesterday it ran about 4.4 billion shares on the NYSE, AMEX, NASDAQ, and regional exchanges. ETF volume, on some days over 50% of the total, was down to 30%, at 1.3 billion shares.

The lower volume encourages some players to stick around during a time when their activity can have a more pronounced market effect. Trading of leveraged and short ETFs gives us a look at what they may be up to.

At yesterday’s prices, all ETFs traded over $58 billion, down from a prior 3-month daily average of $68 billion, a decline of -15%. Over 9/10^ths of the usual $68 billion is in 76 ETFs that normally trade over $100 million a day. Over 3/4^ths of the action is in two dozen ETFs that each trade over $ ½ billion daily.

Over $9 billion of trades were in inverse, or short-positioned ETFs, with less than $6 billion in leveraged long ETFs.

High rollers like the 3x action of the FAS (leveraged long) and the FAZ (levered short).

While trading in the FAS edged off less than ¼ of 1%, volume in the FAZ doubled.

FAS is trading near the middle of its past 52-week range, while FAZ is near its low.

A quick check of all the inverse, or short-position ETFs among the most actives shows that they too are trading near or at their lows.

They may not stay there when the first team returns.

Recent News ETF Investing, investment strategy

Poor Goldman Sachs, they had two trading days last calendar quarter when they LOST money!

When you learn that in 46 of the other 63 days they made over $100 million each day, it is clear that they aren’t taking unnecessary risks. In fact, very few risks at all.

The art form is called hedging, or arbitrage. During the quarter 78% of their profits came from the proprietary trading desk, where it is actively practiced.

These days hedging is made easier by the availability of highly liquid, easily tradable Exchange Traded Funds (ETFs). On Friday over 1.8 billion shares of them were traded, out of a total of 3.5 billion shares between the NYSE and NASDAQ.

That’s right, over half of the trading volume was in ETFs. I wonder who’s doing it. I didn’t trade any 18 million shares (just 1%) on Friday. Did you?

That ETF volume was at an average of $40 a share, worth $73 billion. And this is in the heart of the summer vacation season, when activity is pretty quiet.

Now, if Goldman Sachs made another $100 million on Friday, their vig on just the trading value in ETFs was only 14 basis points, 1/7^th of one percent. Pretty small.

But they don’t do all the trading in ETFs, they have the company of Morgan Stanley, Mother Merrill, Citi, and others.

Hedging these days is made much easier for us common folk by the availability of ETFs that are engineered so that long positions are the same as being short an index, or whatever the ETF is tracking. No margin account is needed, nor any pledge of capital or impairment of borrowing capacity. Just an ordinary cash account at the broker.

Further, many of the short, or inverse ETFs also have a built-in leverage that magnifies the price moves by either two or three. Again, they’re available without any of the usual broker or bank borrowing encumbrances.

These are popular vehicles for risk management. ProShares, the largest provider of leveraged and inverse ETFs, saw $9 billion of trading in their products, just on Friday. With all that activity, perhaps something can be learned by checking out whether there is more enthusiasm for leveraged short ETFs or for leveraged longs.

Here are the upside and downside forecasts of the prop desks and block desks for both sets of ETFs. Any items above the diagonal dotted line have larger downside prospects than upside.

Uncategorized ETF Investing, Market Forecasts, trading strategy

Starting today, Play the Players will have a different look and purpose.

Before, the blog was intended to explain why our philosophy and approach was what it is. We sought to inform, educate, and provide big-picture perspective. We will continue to do that in a separate blog channel set apart for that purpose. It will see periodic entries.

But now our primary blog activity will focus on items of more immediate impact, where timely attention may help you fatten up the P side of your P&L. There may be more than one a week, possibly even more than one in a day particularly well endowed with opportunity.

We will continue to have a particular focus on how professional investors and their organizations utilize Exchange Traded Funds (ETFs) to manage their risk exposures.

That will often involve looking closely at the evolving activities in ETFs that are built to go up when the prices of their holdings go down (inverse, or short ETFs) and the use of ETFs that have the price movement accentuation of leverage as a part of their internal architecture.

On top of all that, our everyday updates of the price range prospects for actively-traded ETFs will continue to provide opportunity for comment as changes occur. And the market thermometers showing the coming-weeks’ price range potentials for the four major market indexes will be present each day.

If you want to be a player, instead of finding yourself played with, check in here regularly.

Recent News ETF Investing, institutional insights