ETF Trading with Larry Connors: Europe, Mutual Funds and the Sell-Off
There are two major occurrences that matter now and are the primary focus.
1. Europe. Yesterday was all Europe. France to be exact. All it took was a small concentrated rumor (likely created by short sellers) to set the market off. Post the rumor on a few websites and it spreads like fire. Yesterday was an example of that.
2. There’s a seemingly unending circle hitting the mutual funds now dealing with the largest redemptions since March of 2009.
One good example is Bruce Berkowitz who was selected as the best mutual fund manager of the past decade (he’s had incredible performance since 2000 until six weeks ago).
His $14 billion Fairholme Fund has lost over 30% of its value recently (as of yesterday’s close) with his largest positions being in bank stocks.
As the redemptions come him, this forces funds like his to sell their biggest positions in stocks like ^BAC^ and ^C^ in order to meet those redemptions.
The more he sells, the more pressure he further puts on these stocks. This then increases the likelihood of more losses occurring which then increases the likelihood of more redemptions, which then leads to … well, you get the point.
Also, because mutual fund holdings are public, they’re easy targets for short sellers adding even greater pressure to these stocks.
This cycle eventually ends and what then ensues are the wild market rallies where many of these stocks will rise double digits over a few days.
The value guys buying (they were buying all along … just much too early) along with the short sellers covering their shorts, then the momentum guys jumping in, quickly leads to very short-term outsized gains.
Assuming that Europe is not going out of business, the market will soon see this bounce and the stocks which were hit the hardest will be the ones that rise the most.
Also, when this happens, volatility will implode (look at the VIX on Tuesday). ETN’s like XIV (Inverse VIX) have the ability to move 20%-40% higher very quickly.
All this though does require the rumors being shrugged off and the redemptions slowing. This is bear market behavior 101 (ok 201) which we’ll likely be seeing it for quite some time. The goal for today is to learn this behavior ahead of time so you can apply it as it occurs.
The above is from Larry Connors’ Daily Battle Plan.
To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.
And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.
Larry Connors is founder and CEO of TradingMarkets.com.