“Liquidity is a coward; when you need her most she runs away and hides!”

The quote in the title is taken from Jeff Saut in his monday commentary which as always is a good read. Jeff makes a number of interesting observations including the following:

Moreover, last Tuesday (-226 DJIA) and Thursday’s (-311 DJIA) declines qualified as 90% downside days with both down volume and points lost 90% greater than up volume and points gained. In fact, on Thursday 479 of the 500 equities in the S&P 500 declined, pushing the advance/decline ratio to an extremely rare 1/18. While some will argue that this is the kind of action seen at market lows, our proprietary indicators are nowhere near oversold levels.

I believe these kinds of extremely one sided advance/decline numbers are going to be far more common than history would suggest. The percentage of stock exchange volume traded by electronic arbitrage firms has grown to be a significant portion of daily volume. Much of the is basket trading against index futures and or Exchange Traded Funds. I have worked with some hedge funds and prop groups that do this kind of trade and the volumes are remarkable. But Indexing, ETFs, and arbitrage do lead to higher correlation among the issues in an index or etf. Most days the effect is negligible but on strongly trending days the effect is very important and should lead to some changes in the readings we see in Advance/Decline type technical measures.

Another old market bromide appropriate to this market is " in a market panic the only thing that goes up is correlation."