Algorithms are not a big deal in and of themselves. However, combined with an exchange that is for-profit, like the CME, who owns the COMEX, gives rise to a situation where the deepest pockets use high frequency trading to get ahead of everyone else. To basically put the price where ever they want and where ever it’s going to be most profitable for them.
Submitted by Dr. Jeffrey Lewis, Silver Coin Investor:
Hey guys, stay right there. I am really excited once again to be here. We are live and also we get to continue our discussion that started about a month and half ago about the reality of Silver prices right now. We’re doing a deep dive. Last week we spent time discussing “standard of care” from a fiduciary standpoint. We discussed technical analysis in the previous week and then we started off the deep dive sections with high frequency trading and algorithm trading.
Today’s topic is data releases and price action.
In future episodes we will cover FOMC, options expiration, (which is actually very important and coming soon), M.O.P.E or Management Of Perception Economics, and then we will finish off this deep dive series with trading patterns, specific to the precious metals which I know you will find very interesting.
One of the most important reasons why I wanted to present date releases today is because, we’re currently, as we’ve been discussing from HFT to algorithm to technical analysis, and then the standard of care, we’re currently in a pattern that gives rise to a very particular type of volatility in which the data releases actually cause a lot more damage than they might normally have.
When we discuss data releases, basically they all conform to the economic growth and inflation; two major indicators of what’s happening in the economy. It boils down to jobs and inflation. The jobs report or the non-farm payroll comes out November 6, along with, and having lesser impact, the Challenger Job cuts.
In addition to mid-month, we saw already the report for September about CPI or inflation. Basically again, it boils down to the two major data points that have the most effect on where prices go in the short-term, CPI and unemployment.
We’ll come back to that in a second but I wanted to just go through the list of the secondary data releases that have less of an impact on short-term price…
They are less important in terms of how they affect data day volatility but they are watched closely by the market players.
Those start out with retail sales, PPI and business inventory.
Again, indirect measures of inflation.
We have average weekly earnings, which is another labor measurement. There is Empire manufacturing.
These are indicators that show up on most major economic calendars.
Initial jobless claims, capital capacity utilization – the general ability to produce versus the actual production. We are looking for the difference between the two.
Then we go into industrial and manufacturing production.
There is also The University of Michigan sentiment indicator. This is a big and more of a behavioral measure.
Then earnings season which happening right now and is not having a direct effect on volatility in the silver market, but it’s certainly something that the world is paying attention to.
There are also world data releases. The world is increasingly flat from a an economic and financial stand point.
- The Euro CPI
- Germany CPI
- UK employment
- Euro area industrial production.
We also must include China and Japan. Their CPI, PPI, trade data and productivity.
Now, the irony of all of these is that the two major data releases that are most important and that typically have the biggest impact, in other words, next Friday when we see the non-farm payroll, if we haven’t already turned down towards the 50 day moving average, we will likely move down at that point. Almost 80 to 90 percent of the time on those Fridays , we see downside action.
Forward guidance is a tool that is used by the The Fed; The largest central bank in the world that’s managing the world reserve currency, (a fiat currency no less) is using this tool called forward guidance to manage the economy.
Forward guidance has evolved because The Fed has run out of the conventional or traditional tools. Interest rates are already zero for all intents. QE threatened to cause a liquidity crisis. “Headline unemployment should be 5 percent. And CPI should 2 percent”. If we can get to those goals, then maybe we can start to raise interest rates or, if not maybe we need to double down or add more liquidity. The FED uses those two measures for policy justification.
I can visualize you shaking your head in terms of the overall absurdity of this. They’re using numbers like CPI and unemployment, the headline numbers, to gauge the management of the world economy, essentially if the dollar is the most liquid and the largest currency.
If you take one step from this premise and you look at what we talked about last week with the trading standard of care, this strong incentive to conform to what the community is doing.
These data points have nothing to do with fundamental analysis and everything to do with technical analysis. And that leaves behavior economics this to a create a collective blindness in it’s wake. We’re really just living in a pseudo reality.
Go back one step to where we were talking about silver prices and technical analysis. We talked about moving averages and relative strength indicators in the moving average convergence and divergence.
The underlying premise is that price reflects all of the relevant information about what’s happening.
This is another belief. You have these beliefs that go extend from “forward guidance” to actual trading and to the standard of care.
It goes all the way back to the origin of price – HFT and algorithm trading on the largest, most important commodities exchange.
We discussed algorithms, which are not a big deal in and of themselves. However, combined with an exchange that is for-profit, like the CME, who owns the COMEX, gives rise to a situation where the deepest pockets use high frequency trading to get ahead of everyone else. To basically put the price where ever they want and where ever it’s going to be most profitable for them.
We are living in a pseudo reality, but the point of all of this is that those two data releases, the one that’s coming in a week and the CPI release, typically have the most impact on price, especially when we’re in a pattern or we’re at the point in the cycle that we are in currently, where you have a very large build-up of a commercial net short position versus a very small managed money position short or conversely, a very large managed money long position, representing contracts that are ripe for the picking.
I wanted to, again, present this with the idea that you are now armed with a deep set of information that you can turn to when you see the volatility so that number one, you have some piece of mind and you can hang in there. Number two, if you’re trading around this, maybe this is an opportunity to wait or if you’re going to sell when we get to a different point in the cycle this will be a time to sell.
Thanks you for listening.