The Algorithm Kicks In

 | Jan 05, 2012 | 2:07 PM EST
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It is looking like the machines have been turned on and are kicking into high gear. The short-squeeze algorithm has been implemented and is now causing cries of pain for the underinvested bulls, who were too fast to take some profits, and the overanxious bears who wanted to play the end of seasonality.

The straight-up action once we exceeded the opening high is indicative of computerized trading. There is no ebb and flow. It is just one-way action and it feeds on itself as the machines work in tandem.

I'm one of the underinvested bulls right now as I've been a bit more cautious lately and more aggressive at taking profits. That has probably been the single easiest mistake to make in a market with such a great tendency toward this lopsided action.

Another reason you can tell that this market is largely machine driven is that individual stocks are highly correlated and little stands out one way or the other. We went from 3-to-1 negative breadth to almost 2-to-1 positive, yet there is little that really stands out. Financials and gold produced the biggest reversals, but there are few big gains and volume is light yet again.

Just knowing that the market is highly machine driven isn't enough. We need to find ways to deal with it and that is not an easy task. The most obvious first step is to simply respect the power of the high-frequency trading when it kicks into gear. Don't try to fight it and keep in mind that the moves tend to last longer than you may think are reasonable.

I'm looking for the programs to relent a bit in the final hour, but right now they have the bears on the run and they know it and they are pressing. Once the profit-taking algorithm kicks in we can dip fast, but often too fast to even play.

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