Market Implosion to Explosion
From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.
The “Derivative Meltdown” panic in the credit markets on Wednesday is the worst any of you have witnessed. There was a spike in inter-bank lending rates fueled by concerns about access to liquidity in the entire global financial system overnight, and sent panic through the entire financial system. One of the biggest money market funds “broke the $1.00”, which prompted a redemption freeze, and this rattled all investors. Russia closed its stock market for the second day and gold made its largest one day dollar move ($70) ever as the $US Dollar got hit with the $DXY -1.4%. On top of that crude oil advanced $6. The scoreboard said LEH and AIG were history, and MER ran to BAC to preempt the fate of LEH and AIG.
Fast forward to yesterday, and the SPX knifed down to 1133.50 as the short raid on MS took it down to 11.71 (MS and WB in merger talks) The initial break on Tuesday of the 1172 .50RT to 769 from 1576 hit 1169.28, and then quickly reversed to 1213.60, so our trading service members had an excellent day on the long side. The next lower price zone is 1152-1144, and the SPX closed at 1156.29 on Wednesday. Yesterday, the SPX hit another key price zone at 1136, which is the 360 degree angle measured from 1576, and the SPX reversed to a 1211.14 high and 1206.51 close (+4.3).
There was lots of news and rumors yesterday like the UK banning short sales, US Pensions funds saying they won’t lend stocks like MS and MER, the FED, ECB, and Bank of Japan leading a global plan to inject $247 billion into the credit markets. The rumor that spiked the major indexes on the 3:00 PM bar, when the SPX ran from 1170 to the 1206.51 close, was that our new big brother, the government, had a comprehensive plan, similar in objective to the old RTC (Resolution Trust Corporation) to free up the credit market. The SEC expanded the short sale rule to include 800 financial stocks until 10/1/08, and can be extended in 30 day periods after that. Net-Net, if they had not changed the plus tick rule, and still had the Specialist system, in conjunction with ECN’s, instead of taking the Specialist almost 100% out of the game, there would have been far less turmoil in the individual financial stocks. MS reversed yesterday from 11.71 to 24.90 before closing at 22.55. It had closed Tuesday at 28.70 Instead of all the B—S— from the SEC and Congress about short selling, they should just do an audit trail on the large hedge funds in those bear raid financial stocks to start, and they will know who the so-called bad guys are.
Today, we have the buzz about the latest “new and better” plan to free up the credit markets, and the futures exploded to the upside last night, and are higher now, with the S&P futures +53 points, and the INDU futures +344. Foreign markets have taken off, and Russia and China had there biggest rally in years, while gold plunged the most in over 25 years. Financial stocks are soaring overseas, and the shorts have taken a huge hit across the board.
The good news is that the SPX hit the key price zone from 1172-1077 where the scale in process to increase long term equity allocation has been started, and the bad news of course is that the market reversed after only a couple of days in the zone, down to the intraday 1333.50 intraday low yesterday.
Today is triple witch, and I don’t know how much volatility the short restrictions on the option market makers will effect market volatility today, but the decision to apply the rule to option market makers makes no sense to me, or any other professional that understands how the business works.
The rumors about the new government proposal change by the minute, and as I sign off at 8:37AM, the INDU futures are +391, and the SPX futures are +58.5. This will take a few days to sort itself out, but there will be a couple of good intraday extended short opportunities today in the major indexes for day traders.
Have a good trading day!
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