I am sitting in a corner office at 30 S. Wacker (former home of the Merc or Chicago Mercantile Exchange). It was one of my first weeks, a random Wednesday in 2005. Oil inventories come out and it is worse than expected. Oil rallies and the market proceeds to break. At this time, I am still too new to not be embarrassed to ask why. They amuse me and it is explained to me that higher oil prices mean higher input costs and a drag on earnings. Makes perfect sense on the surface. This worked for awhile. Then something predictable happened. Oil came out worse and S&P 500 rallies. Then Oil comes out way better and the market breaks. You can fill in the rest of the scenarios.
I specifically remember these events because it was as traumatic as when I was sitting on a Grandparents style flannel couch in Idaho when my older sisters told me Santa wasn’t real. What else wasn’t true, please not the Easter Bunny?
Who knows how long it took to me realize the correlation was broken. Why did it break? Like the know it all idiot I refused to ask questions. I was too embarrassed like I was the only person in the world that didn’t know.
Why did the correlation break?
The simple answer is because it can and because f*ck you. I can’t remember the exact context of what happened in 2005. But generally correlations break for two reason. One is because something else is more important and different but related is maximizing profit in current position and they use the number to press it or get out.
As a trader you are always looking at what the market finds most important, usually in areas of extremes. Participants can no longer wait; losing too much or fear of missing out. Think about it another way. You forget to make your bed and your parents yell at you and ground you. This reaction is a bit extreme unless your parents are just having a bad. What happened was you didn’t make your bed but most importantly they were in a bad mood. Technicals, trends, fundamentals might be more important than the number.
It is the Thursday before Non Farm Payrolls and on the close someone is starting to accumulate a big position. The number comes out and it goes in their direction. All you hear on the news is the one part of the number is good or bad or below or above expectations and that is why the market did whatever it did.
Whenever this scenario happens there is always chatter that they got the number first. That is certainly a possibility but it is also possible that they used the dynamics of the market near the time of the release mainly the ability to move the market relatively cheaply to get better prices.
Should this be legal? I am not sure but if they get prosecuted they should also ban overnight trading because it can happen there as well. That last sentence probably didn’t get me any new MySpace fans but it is not a risk free trade. You live by liquidity sword, you die by the liquidity sword. At least in the the case of futures you can see the accumulations and dissipations. The solace for market participants is that it only takes being wrong once and the people who look for these types of advantages are too stupid to stop.
The reaction to the number is always more important than the number. The Stalwart created the hashtag #NFPguesses. One of the greatest social media carnival barkers the world has ever seen. (He also is a good guy and has great hair.) You can say what you want about his job but he is good at it. With that being said his job is to get people to read what he writes and I am guessing there are other reasons for people to guess with numbers instead of the reaction. Reaction > The Number.
Trading around numbers is a crap shoot. I have seen the market do everything on a release. Rally, break, do nothing. Hold technicals, blow through technicals, etc. Much of the reaction to a release is based on what is most important and maximizing a previous position. Like the Oil inventories release and S&P 500, correlations break. Nothing lasts forever.
So how can you tell if they got the number first? You can’t but the number does not matter, there are more important things.
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