Welcome to Thanksgiving Week. Trading is expected to wane during the week as the markets are closed Thursday and are only open to 1:00 PM on Friday. Liquidity may be “challenged” given the potential dearth of traders.
The economic calendar has several top tier indicators, the response to which may be exacerbated, perhaps specifically in the Treasury market, given these liquidity issues.
Changing topics, both Apollo Global Management and Citadel, giants in the hedge fund world, again warned of the dangers of indexing and passive investing. Both firms state higher volatility may occur because of lower liquidity magnified by massive concentration of monies in a handful of names, in an environment void of market clearing and stabilizing mechanisms given regulatory fiat.
Passive investing now accounts for more than 60% of all assets in mutual funds and exchanged traded funds globally.
It is written the cheapest execution is often the most expensive transaction. By definition, there is no price discovery in passive investing. Funds are allocated by size and momentum. In an up market the biggest names are the greatest beneficiaries. Conversely in a down market, the largest names will suffer the greatest losses.
As widely disseminated, the S & P 500 is 35% comprise of seven companies. The remainder 93 companies make up the remaining 65%. Eight years ago, the top seven firms were less than 10% of the S & P 500 capitalization.
Wow! The basic premise for a stock to go higher is to have more buyers than sellers. Amoebas do not grow to infinite in a Petrie dish. At some juncture there will be certain death by overcrowding.
What will happen this week?
The economic calendar includes several manufacturing indices, a sentiment indicator, revised GDP and quarterly PCE data, inventories, personal spending and income and the Minutes from the recent FOMC meeting.
Last night the foreign markets were mixed. London was up 0.25%, Paris down 0.02% and Frankfurt up 0.22%. China was down 0.10%, Japan up 1.30% and Hang Seng down 0.41%.
Futures are up about 0.5% as the markets are endorsing Trump’s pick for Treasury Secretary. The 10-year is up 12/32 to yield 4.35%.
