Here’s the question I hear from so many people: why bother with high frequency charts? High-frequency trading is risky, which is part of the reason it hasn’t proliferated to the mainstream level. It’s a way for people to learn and trade, but to lose money doing so.
You can buy cheap stocks, like those of Apple, which has just announced another record quarterly profit. Even a modest increase in this stock price will make it look more appealing than it already does.
Apple’s shares are trading at $116 – the highest price in the Apple world since the merger with Compaq (PCQX) in 1995, according to the BATS Global Market Intelligence web database.
Apple shares are trading higher than they were in the last big peak of this high-frequency market in October of 2008, when Apple’s stock market capitalization was $170.8 billion. Apple’s current market cap stands at $214.4 billion.
At the time, the U.S. dollar made up about 70% of every transaction in the high frequency trading space, compared with about 70% in the secondary market. Investors were attracted to Apple because of their large cash reserves, which has helped make Apple into a large market holding.
Apple’s stock market capitalization, now down by $24 billion, will likely fall from that number. It’s unlikely that Apple will ever regain that level of market weight, which is why I believe trading on Apple’s stock has become a loser’s game for people who are not in on the action.
This high turnover is not helped by price-earnings ratios. A single market operator with one large market capitalization can move the price of any stock, as the industry price-earnings ratio approaches 30.
The best indicator of whether a company is getting too hot for its breeches is its price-earnings ratio. So Apple’s stock-price action in 2012 should tell us everything we need to know. The S&P 500 index, the broader index of the Dow Jones Industrial Average, and the NASDAQ are currently in the 20s. The NASDAQ currently trades at 18.55.
If the S&P 500 moves back above 18.15 during 2012, this indicates Apple stock is getting hot. It would have to fall sharply in the new year for Apple to fall below 18.15 – which it won’t do.
High Frequency Trading’s Risk
High frequency trading is risky and carries enormous risk
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