Thursday, May 6, 2010

Shipwreck

"The problem with manipulation is that people can turn on you."
--Horatio Caine (CSI Miami)

Today was a rare day, featuring an intraday 1000 pt move lower in the Dow. After leaking thru the morning and the early afternoon, US financial markets lost it. In the span of a few minutes the Dow went from -300 to -1000, bottoming near the early Feb lows of about 9800.


Those quick triggered folks who bought Spoos down there were soon rewarded, as markets soon rebounded back toward being down 'only' 3% or so.

Rumors are circulating that this was mostly anomoly. Theories include: a trader at Citi fat fingered a billion share trade rather than a million share trade; black boxes of high frequency traders went wild; those trading naked credit default swaps put things in motion. etc.

While I wouldn't rule out any of those, particularly as a potential contributor to exacerbating short term volatility, the bigger picture concerns the leveraged state of the world.

The nature of leverage is this. When things are perceived as fine, leverage tends to depress volatility because of all of the liquidity that narrows bid/ask spreads and keeps uptrends neatly in place. But when things are perceived as not fine, that liquidity leaves the system as folks seek to cover their leveraged bets, leaving 'bid wanted' types of situations.

I have little doubt that this accounted for much of the action. And as long as the world continues in its leveraged condition, behavior similar in nature if not magnitude should be expected.

Heck, it was the way of the world less than two years ago. And since then overall leverage is higher rather than lower thx to socialization of risk.


What happens in the near term is anyone's guess. It's admittedly hard for me not to feel bearish here; I'm having trouble shaking the down-up-DOWN patterns that characterized the 1987 and 1929 daily charts. At the same time, one can't dismissed the power of the press--the monetary printing press, that is--that major central banks have at their disposal. You can bet there will be some big conference calls tonite between the ECB/Greece bailout contingent and central banks around the world.

As it currently stands, I'd be inclined to view a lower opening tomorrow as bullish, and a higher open tomorrow as bearish--at least for a trade. In the intermediate/longer term, my sense is that the path of least resistance may now be lower.


btw, what was the port in the storm today? Gold. It was moving higher today against nearly everything. Perhaps more folks are connecting the dots--that the only way out of this debt problem is to print our way out. Which, of course, is not a real 'way out' at all.

position in SPX, gold

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