expect next.When the markets are diverging from their normal rotation, the analyst is alerted tothe fact that something is amiss and is warned to be more careful. While the analystmay not always understand exactly what the markets are doing, it can be helpful toknow what they're supposed to be doing. Figure 13.3 shows how commodity pricesbehaved in the four recessions between 1970 and 1982.THE ROLE OF BONDS IN ECONOMIC FORECASTINGThe bond market plays a key role in intermarket analysis. It is the fulcrum thatconnects the commodity and stock markets. The direction of interest rates tells a lotabout inflation and the health of the stock market. Interest rate direction also tellsa lot about the current state of the business cycle and the strength of the economy.Toward the end of an economic expansion, the demand for money increases, resultingin higher interest rates. Central bankers use the lever of higher interest rates to reinin inflation, which is usually accelerating.At some point, the jump in interest rates stifles the economic expansion and is amajor cause of an economic contraction. The event that signals that the end is in sightis usually a significant peak in the bond market. At that point, an early warning is beinggiven that the economy has entered a dangerous inflationary environment. This signal isusually given around the midway point in the expansion. After the bond market peaks,stocks and commodities can continue to rally for sometime, but stock investors shouldstart becoming more cautious. Economists also should take heed.During an economic contraction, demand for money decreases along with inflation pressures. Interest rates start to drop along with commodities. The combinedeffect of falling interest rates and falling commodity prices causes the bond market tobottom. This usually occurs in the early stages of the slowdown (or recession). Stocksand commodities can continue to decline for awhile, but stock market investors aregiven an early warning that the time to begin accumulating stocks is fast approaching.Economists have an early indication that the end may be in sight for the economiccontraction. The bond market fulfills two important roles which are sometimes hardto separate. One is its role as a leading indicator of stocks (and commodities). Theother is its role as a leading indicator of the economy.Bond prices have turned in an impressive record as a leading indicator of theeconomy, although the lead time at peaks and troughs can be quite long. In his book,
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FIGURE 13.3A MONTHLY CHART OF THE CRB FUTURES PRICE INDEX THROUGH THE LAST FOUR BUSINESSCYCLE RECESSIONS (MARKED BY SHADED AREAS). COMMODITY PRICES USUALLY WEAKENDURING A RECESSION AND BEGIN TO RECOVER AFTER THE RECESSION HAS ENDED. THE1980 PEAK IN THE CRB INDEX OCCURRED AFTER THE 1980 RECESSION ENDED BUT BEFORETHE 1981-1982 RECESSION BEGAN. (SOURCE: 1964 COMMODITY YEAR BOOK, COMMODITYRESEARCH BUREAU, INC.)CRB
Commodity Research Bureau (CRB) Futures Price Index (1967=100)
LONG- AND SHORT-LEADING INDEXES
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than the current list of eleven leading indicators published monthly by the U.S.Department of Commerce in the Business Conditions Digest. The long-leading index,comprised of four indicators (the Dow Jones 20 Bond Average, the ratio of price tounit labor cost in manufacturing, new housing permits, and M2 money supply), hasled business cycle turns by 11 months on average.Moore also recommends adoption of a new "short-leading index" of 11 indicators. The short-leading index has led business cycle turns by an average of fivemonths, slightly shorter than the six-month lead of the current leading indicatorindex. (Figure 13.4 shows the CIBCR long- and short-leading indexes in the eightrecessions since 1948.) Moore suggests changing the number of leading indicatorsfrom 11 to 15 and using his long- and short-leading indexes in place of the currentleading index of 11 indicators. Both the current leading index and Moore's shortleading index include two components of particular interest to analysts—stock andcommodity prices.
FIGURE 13.4THE LONG- AND SHORT-LEADING INDEXES DEVELOPED BY GEOFFREY H. MOORE AND COLUMBIA UNIVERSITY'S CENTER FOR INTERNATIONAL BUSINESS CYCLE RESEARCH (CIBCR).BOND PRICES (DOW JONES BOND AVERAGE) ARE PART OF THE LONG-LEADING INDEX,WHEREAS STOCKS (S&P 500) AND COMMODITIES (JOURNAL OF COMMERCE INDEX) AREPART OF THE SHORT-LEADING INDEX. (SOURCE: BUSINESS CONDITIONS DIGEST, U.S. DEPARTMENT OF COMMERCE, BUREAU OF ECONOMIC ANALYSIS, FEBRUARY 1990.) SHADEDAREAS MARK RECESSIONS.CIBCR Composite Indexes of Leading Indicators
Leading Indicators for the 1990s (Dow Jones-Irwin, 1990), Geoffrey Moore, one thenation's most highly regarded authorities on the business cycle, details the history ofbonds as a long-leading indicator of business cycle peaks and troughs. Since 1948,the U.S. economy has experienced eight business cycles. The Dow Jones 20 BondAverage led each of the 8 business cycle peaks by an average of 27 months. At the 8business cycle troughs, the bond lead was a shorter 7 months on average. Bond pricesled all business cycle turns combined since 1948 by an average of seventeen months.LONG- AND SHORT-LEADING INDEXESDr. Moore, head of the Center for International Business Cycle Research at ColumbiaUniversity in New York City, suggests utilizing bond prices as part of a "long-leadingindex," which would provide earlier warnings of business cycle peaks and troughs
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STOCKS AND COMMODITIES AS LEADING INDICATORSStocks and commodities also qualify as leading indicators of the business cycle,although their warnings are much snorter than those of bonds. Research providedby Dr. Moore (in collaboration with Victor Zarnowitz and John P. Cullity) in thepreviously-cited work on "Leading Indicators for the 1990s" provides us with leadand lag times for all three sectors—bonds, stocks, and commodities—relative to turnsin the business cycle, supporting the rotational process described in Figure 13.1.In the eight business cycles since 1948, the S&P 500 stock index led turns by anaverage of seven months, with a nine-month lead at peaks and five months at troughs.Commodity prices (represented by the Journal of Commerce Index) led business cycleturns by an average of six months, with an eight-month lead at peaks and two monthsat troughs. Several conclusions can be drawn from these numbers.
FIGURE 13.5A COMPARISON OF THE DOW JONES BOND AVERAGE, THE DOW JONES INDUSTRIAL AVERAGE, AND GOLD DURING 1987. THE THREE MARKETS PEAKED DURING 1987 IN THE CORRECTROTATION-BONDS FIRST (DURING THE SPRING), STOCKS SECOND (DURING THE SUMMER),AND GOLD LAST (IN DECEMBER). GOLD CAN RALLY FOR A TIME ALONG WITH BONDS ANDSTOCKS BUT PROVIDES AN EARLY WARNING OF RENEWED INFLATION PRESSURES.Dow Jones Bond Average versus Dow Stocks versus Gold
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One is that technical analysis of bonds, stocks, and commodities can play arole in economic analysis. Another is that the rotational nature of the three markets,as pictured in Figure 13.1, is confirmed. Bonds turn first (17 months in advance),stocks second (seven months in advance), and commodities third (six months inadvance). That rotational sequence of bonds, stocks, and commodities turning in orderis maintained at both peaks and troughs. In all three markets, the lead at peaks is muchlonger than at troughs. The lead time given at peaks by bonds can be extremely long(27 months on average) while commodities provide a very short warning at troughs(two months on average). The lead time for commodities may vary depending on thecommodity or commodity index used. Moore favors the Journal of Commerce Indexwhich he helped create. (Figures 13.5 through 13.8 demonstrate the rotational natureof bonds, stocks, and commodities from 1986 to early 1990.)
FIGURE 13.6A COMPARISON OF THE DOW JONES BOND AVERAGE, THE DOW JONES INDUSTRIAL AVERAGE, AND THE CRB FUTURES PRICE INDEX DURING 1987 AND 1988. THREE MAJOR PEAKSCAN BE SEEN IN THE NORMAL ROTATIONAL SEQUENCE-BONDS FIRST, STOCKS SECOND,AND COMMODITIES LAST. ALTHOUGH THE CRB INDEX DIDN'T PEAK UNTIL MID-1988, GOLDTOPPED OUT SIX MONTHS EARLIER AND PLAYED ITS USUAL ROLE AS A LEADING INDICATOROF COMMODITIES.Dow Jones Bond Averages versus Dow Stocks versus Commodities
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FIGURE 13.7THE UPPER CHART COMPARES TREASURY BOND FUTURES PRICES WITH THE DOW JONESINDUSTRIAL AVERAGE FROM 1986 THROUGH THE FIRST QUARTER OF 1990. THE BOTTOMCHART SHOWS THE CRB INDEX DURING THE SAME PERIOD. THE CRB INDEX RALLY INEARLY 1987 COINCIDED WITH THE PEAK IN BONDS, WHICH PRECEDED THE STOCK MARKETPEAK. THE COMMODITY PEAK IN MID-1988 LAUNCHED A NEW UPCYCLE FOR THE FINANCIAL MARKETS. IN LATE 1989, THE COMMODITY RALLY PRECEDED DOWNTURNS IN BONDSAND STOCKS. NOTICE THE ORDER OF TOPS IN 1986 (BONDS), 1987 (STOCKS), AND 1988(COMMODITIES).
Chapter 7 includes a discussion of the various commodity indexes, includingthe CRB Futures Price Index, the CRB Spot Index, the CRB Spot Raw IndustrialsIndex, the CRB Spot Foodstuffs Index, and the Journal of Commerce Index of 18 keyraw industrials. Readers unfamiliar with the composition of the indexes might wantto refer back to Chapter 7, which also includes a discussion of the relative meritsof commodity indexes. Moore and some economists prefer commodity indexes thatutilize only industrial prices on the premise that they are better predictors of inflationand are more sensitive to movements in the economy.Martin Pring in the previously-cited work, the .Asset Allocation Review, prefersthe CRB Spot Raw Industrials Index. Pring and many economists believe that theCRB Futures Price Index, which includes food along with industrial prices, is ofteninfluenced more by weather than by economic activity. I've expressed a preference for
COPPER AS AN ECONOMIC INDICATOR
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FIGURE 13.8THE UPPER CHART COMPARES TREASURY BOND FUTURES PRICES WITH THE DOW JONESINDUSTRIALS DURING THE SECOND HALF OF 1989 AND THE FIRST QUARTER OF 1990. THEBOTTOM CHART SHOWS THE CRB FUTURES INDEX DURING THE SAME PERIOD. THE NORMALROTATIONAL SEQUENCE BETWEEN THE THREE MARKETS CAN BE SEEN. THE COMMODITYTROUGH DURING THE SUMMER OF 1989 CONTRIBUTED TO THE DOWNTURN IN BONDS,WHICH EVENTUALLY PULLED STOCKS LOWER.
the CRB Futures index because of my belief that food is a part of the inflation pictureand can't be ignored. It's up to the reader to decide which of the many commodityindexes to employ. Since none of the commodity indexes are perfect, it's probably agood idea to keep an eye on all of them.COPPER AS AN ECONOMIC INDICATORCopper is a key industrial commodity. It's importance is underlined by the fact that itis included in every major commodity index. This is not true of some other importantcommodities. No precious metals are included in the Journal of Commerce Index orthe Spot Raw Industrials Index. Crude oil is included in the Journal of CommerceIndex but not in the Raw Industrials Index. The only other industrial commoditythat is included in every major commodity index is the cotton market. (All of thepreviously-mentioned commodities are included in the CRB'Futures Index.)
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Because copper is used in the automotive, housing and electronics industries,a lot can be learned about the strength of the economy by studying the strengthof the copper market. During periods of economic strength, demand from the threeindustries just cited will keep copper prices firm. When the economy is beginningto show signs of weakness, demand for copper from these industries will drop off,resulting in a declining trend in the price of copper. In the four recessions since1970, the economic peaks and troughs have coincided fairly closely with the peaksand troughs in the copper market.Copper hit a major top at the end of 1988 and dropped sharply throughout most of1989 (Figure 13.9). Weakness in copper futures suggested that the economy was slowing and raised fears of an impending recession. At the beginning of 1990, however, copper prices stabilized and started to rally sharply. Many observers breathed a sigh of relief at the copper rally (and that of other industrial commodities) and interpreted theprice recovery as a sign that the economy had avoided recession (Figure 13.10).
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FIGURE 13.10COPPER FUTURES COMPARED TO THE DOW INDUSTRIALS FROM MID-1989 THROUGH THEFIRST QUARTER OF 1990. BOTH MARKETS SHOWED A STRONG POSITIVE CORRELATIONDURING THOSE NINE MONTHS BECAUSE BOTH WERE REACTING TO SIGNS OF ECONOMICSTRENGTH AND WEAKNESS. BOTH PEAKED TOGETHER IN OCTOBER OF 1989 AND THENTROUGHED TOGETHER DURING THE FIRST QUARTER OF 1990.Copper Futures
FIGURE 13.9A COMPARISON OF COPPER FUTURES PRICES (UPPER CHART) WITH THE DOW INDUSTRIALS(LOWER CHART) FROM 1987 TO THE FOURTH QUARTER OF 1989. COPPER PEAKED AFTERSTOCKS IN LATE 1987, BEFORE BOTH RESUMED THEIR UPTRENDS. THE COLLAPSE IN COPPERDURING 1989 RAISED FEARS OF RECESSION, WHICH BEGAN TO HAVE A BEARISH INFLUENCEON STOCK PRICES. COPPER HAS A PRETTY GOOD TRACK RECORD AS A BAROMETER OFECONOMIC STRENGTH.Copper Futures
COPPER AND THE STOCK MARKET
Recession fears played on the minds of equity investors as 1989 ended. During thenine months from July 1989 to March of 1990, the correlation between the coppermarket and the stock market was unusually strong (Figure 13.10). It almost seemedthat both markets were feeding off one another. The stock market selloff that startedin October of 1989 coincided with a peak in the copper market. The strong rally thatbegan in American equities during the first week of February 1990 began a week afterthe copper market hit a bottom and also started to rally sharply. Although the linkbetween the stock market and copper is not usually that strong on a day-to-day basis,there are times (such as the period just cited) when their destinies are closely tiedtogether. Stocks are considered to be a leading indicator of the economy. Copper isprobably better classified as a coincident indicator. Turns in the stock market usuallylead turns in copper. However, both are responding to (or anticipating) the healthof the economy. As a result, their fortunes are tied together. (Figure 13.11 comparescopper prices to automobile stocks.)
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FIGURE 13.11COPPER FUTURES (UPPER CHART) ALSO SHOWED A STRONG CORRELATION WITH AUTOMOBILE STOCKS (BOTTOM CHART) IN THE NINE MONTHS FROM MID-1989 THROUGH THEFIRST QUARTER OF 1990. THE AUTOMOBILE INDUSTRY IS ONE OF THE HEAVIEST USERS OFCOPPER, AND THEIR FORTUNES ARE OFTEN TIED TOGETHER.
SUMMARY
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FIGURE 13.12WEAKNESS IN COPPER PRICES (UPPER CHART) AND THE JOURNAL OF COMMERCE INDEX OF18 INDUSTRIAL MATERIALS (BOTTOM CHART) DURING 1989 RAISED FEARS OF RECESSION.HOWEVER, AS INDUSTRIAL COMMODITIES RECOVERED IN EARLY 1990, MANY TOOK THISAS A SIGN THAT A RECESSION HAD BEEN POSTPONED. ECONOMISTS PAY CLOSE ATTENTIONTO INDUSTRIAL COMMODITIES.
Copper FuturesCopper Futures
Automobile StocksJournal of Commerce Index
A strong copper market implies that the economic recovery is still on soundfooting and is a positive influence on the stock market. A falling copper marketimplies that an economic slowdown (or recession) may be in progress and is a negativeinfluence on the stock market. One of the advantages of using the copper market as abarometer of the economy (and the stock market) is that copper prices are available ona daily basis at the Commodity Exchange in New York (as well as the London MetalExchange). Copper also lends itself very well to technical analysis. (Figure 13.12shows copper and other industrial prices rallying in early-1990 after falling in late1989.)SUMMARYThe 4-year business cycle provides an economic framework for intermarket analysisand explains the chronological sequence that is usually seen between the bond, stock,and commodity markets. Although not a rigid formula, the peaks and troughs thattake place in these three asset classes usually follow a repetitive pattern where bonds
turn first at peaks and troughs, stocks second, and commodities third. The turn in thebond market is usually activated by a turn in the commodity markets in the oppositedirection. Gold usually leads the general commodity price level and can be used asan early warning of inflation pressures.The chronological rotation of the three sectors has important implications for theasset allocation process. The early stages of recovery favor financial assets, whereasthe latter part of the expansion favors commodity prices or other inflation hedges.Bonds play a dual role as a leader of stocks and commodities and also as a longleading economic indicator. Copper also provides clues to the strength of the economyand, at times, will track the stock market very closely.
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WHAT CAUSES PROGRAM TRADING?
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The same story, which used arbitrage selling to explain the drop in Tokyo, began itsexplanation of a rally in the London stock market with the following sentence:London stocks notched gains amid sketchy trading as futures-related buying and abullish buy recommendation... pulled prices higher.(Wall Street Journal, 3/8/90)
The Myth of Program TradingOne recent Friday morning, one of New York's leading newspapers used the followingcombination of headlines and lead-ins to describe the previous day's events in thefinancial markets:Cocoa futures surged to seven-month highs...The dollar dropped sharply...Prices of Treasury securities plummeted...Tokyo stocks off sharplyProgram sales hurt stocks; Dow off 15.99(New York Times, 3/30/90)
PROGRAM TRADING- AN EFFECT, NOT A CAUSE
Dow Up 29 as Programs Spark Advance(Investor's Daily, 3/28/90)
It's easy to see why most observers mistakenly treat program trading as a cause ofstock market trends. It provides an easy explanation and eliminates the need to digdeeper for more adequate reasons. Consider how program trading looks to the casualobserver. As stock index futures rise sharply, arbitrage activity leads traders to buya basket of stocks and sell stock index futures in order to bring the futures and cashprices of a stock index back into line. A strong upsurge in stock index futures causes"buy programs" to kick in and is considered bullish for stocks. A sharp drop instock index futures has the opposite effect. When the drop in stock index futuresgoes too far, traders sell a basket of stocks and buy the stock index futures. Theresulting "sell programs" pull stock prices lower and are considered to be bearishfor stocks.It appears on the surface (and is usually reported) that the stock market rose (orfell) because of the program buying (or selling). As is so often the case, however, thequick and easy answer is seldom the right answer. Unfortunately, market observers see"program trading" impacting on the stock market and treat it as an isolated, marketmoving force. What they fail to realize is that the moves in stock index futures, whichactivate the program trading in the first place, are themselves usually caused by movesin related markets—the bond market, the dollar, and commodities. And this is wherethe real story lies.
Industrials Advance 29.28 Points on Arbitrage Buying(Wall Street Journal, 3/28/90)
WHAT CAUSES PROGRAM TRADING?
Despite the fact that all of the first four stories were bearish for stocks, "programsales" were used to explain the weakness in the Dow. The next day, the same papercarried these two headlines:Prices of Treasury Issues Still FallingDow Off 20.49 After "Buy" Programs End(New KM* Times, 3/31/90)
This time, the culprit wasn't "sell" programs, but the absence of "buy" programs. Thereal explanation (the drop in Treasury issues) was mentioned briefly in paragraph fiveof the stock market story. Earlier that same week, two other financial papers explaineda stock market rally with these headlines:
The international markets are not immune to this type of reporting. A couple of weeksearlier, one of the papers carried the following headline in a story on the internationalstock markets:Tokyo Stocks Drop Sharply on Arbitrage Selling by Foreign Brokers...(Wall Street Journal, 3/8/90)240
A reader of the financial press can't help but notice how often "program trading"is used to explain moves in the stock market. Even on an intra-day basis, a morning'sselloff will be attributed to rounds of "program selling" only to be followed by anafternoon rally attributed to rounds of "program buying." After a while, "programtrading" takes on a life of its own and is treated as an independent, market-movingforce. A reader could be forgiven for wondering what moved the stock market on aday-to-day basis before "program trading" captured the imagination of the financialmedia. A reader could also be forgiven for starting to believe the printed reports that"program trading" really is the dominant force behind stock market moves. In thischapter, the myth of "program trading" as a market-moving force will be explored.An attempt will be made to demonstrate that market forces that are usually blamedon "program trading" are nothing more than intermarket linkages at work.
Instead of treating program trading as the cause of a stock market move and endingthe story there, the more pertinent question to be asked is "what caused the programtrading in the first place?" Suppose S&P 500 stock index futures surge higher at 10:00A.M. on a trading day. The rally in stock index futures is enough to push the futuresprice too far above the S&P 500 cash value, and "program buying" is activated. Howwould that story be treated? Most often, the resulting rally in the stock market would
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be attributed to "program buying." But what caused the program buying? What causedthe stock index futures to rally in the first place?The program buying didn't get activated until the S&P stock index futures ralliedfar enough above the S&P 500 cash index to place them temporarily "out of line." Theprogram trading didn't cause the rally in the stock index futures—the program buyingreacted to the rally in stock index futures. It was the rally in stock index futures thatstarted the ball rolling. What caused the rally to begin in stock index futures, whichled to the program buying? If observers are willing to ask that question, they willbegin to see how often the sharp rally or drop in stock index futures is the directresult of a corresponding sharp rise or drop in the bond market, the dollar, or maybethe oil market.Viewed in this fashion, it can be seen that the real cause of a sudden stock marketmove is often a sharp move in the bond market or crude oil. However, the rippleeffect that starts in a related financial market (such as the bond market) doesn't hitthe stock market directly. The intermarket effect flows through stock index futuresfirst, which then impact on the stock market. In other words, the program tradingphenomenon (which is nothing more than an adjustment between stock index futuresand an underlying cash index) is the last link in an intermarket chain that usuallybegins in the other financial markets. Program trading, then, can be seen as an effect,not a cause.PROGRAM TRADING AS SCAPEGOAT
The problem with using program trading as the main culprit, particularly duringstock market drops, is that it masks the real causes and provides an easy scapegoat.Outcries against index arbitrage really began after the stock market crash of 1987and again during the mini-crash two years later in October of 1989. Critics arguedthat index arbitrage was a destabilizing influence on the stock market and shouldbe banned. These critics ignored some pertinent facts, however. The introduction ofstock index futures in 1982 coincided with the beginning of the greatest bull marketin U.S. history. If stock index futures were destabilizing, how does one explain theenormous stock market gains of the 1980s?A second, often-overlooked factor pertaining to the 1987 crash was the fact thatthe stock market collapse was global in scope. No world stock market escaped unscathed. Some world markets dropped much more than ours. Yet, index arbitragedidn't exist in these other markets. How then do we explain their collapse? If indexarbitrage caused the collapse in New York, what caused the collapse in the othermarkets around the globe?A dramatic example of the dangers of using program trading to mask the realevents behind a stock market drop was seen during the first quarter of 1990 in Japan.During the early stages of the plunge in the Japanese stock market, index arbitrage wasfrequently cited as the main culprit. At first, the stock market plunge wasn't taken tooseriously. However, a deeper analysis revealed a very dangerous intermarket situation(as described in Chapter 8). The Japanese yen had started to drop dramatically, andJapanese inflation had turned sharply higher. Japanese bonds were in a freefall. Thesebearish factors were ignored, at least initially, in deference to cries for the banning ofindex arbitrage.By the end of the first quarter of 1990, the Japanese stock market had lost about32 percent. Two major contributing factors to that debacle were a nine percent lossin the Japanese yen versus the U.S. dollar and a 13 percent loss in the Japanese bond
AN EXAMPLE FROM ONE DAY'S TRADING
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market. The intermarket picture in Japan as 1990 began looked very ominous for theJapanese market (and was not unlike the situation in the United States during 1987with a falling dollar, rising commodity prices, and a falling bond market). However, itwasn't until the stock market plunge in Japan took on more serious proportions thatmarket observers began to look beyond the "program trading" mirage for the moreserious problems facing that country.Chapter 2 described the events leading up to the stock market crash in the American stock market in 1987. Preceding the stock market crash, the dollar had beendropping sharply, commodity prices had broken out of a basing pattern and wererallying sharply higher, and the bond market had collapsed. Textbook intermarketanalysis would categorize this intermarket picture as bearish for stocks. Yet, stockscontinued to rally into the summer and fall of 1987, and no one seemed concerned.When the bubble finally burst in October of 1987, "program trading" was most oftencited as the reason for the collapse. Many observers at the time claimed that no otherreasons could explain the sudden stock market plunge. They said the same thing inJapan in 1990.The events in the United States in 1987 and Japan in 1990 illustrate how thepreoccupation with program trading often masks more serious issues. Program tradingis the conduit through which the bearish (or bullish) influence of intermarket forcesis carried to the stock market. The stock market is usually the last sector to react. Asawareness of these intermarket linkages described in the preceding chapters grows,market observers should become more aware of the ripple effect that flows throughall the markets, even on an intra-day basis.Program trading has no bullish or bearish bias. In itself, it is inherently neutral. It simply reacts to outside forces. Unfortunately, it also speeds up and usually exaggerates the impact of these forces. Program trading is more often the "messenger" bearing bad (or good) news than the cause of that news. Up to now, toomuch focus has been placed on the messenger and not enough on the message beingbrought.AN EXAMPLE FROM ONE DAY'S TRADING
One way to demonstrate the lightning-quick impact of these intermarket linkages andtheir role in program trading is to study the events of one trading day. The day underdiscussion is Friday, April 6,1990. We're going