Markets Sell-Off as Buying Panic Takes Breather
This morning’s open is expected to be significantly lower because of the continuing saga in Europe, combined with MF Global’s bankruptcy filing.
The markets are slightly oversold this coming into this morning and if they open where the futures are trading at 6:30 am ET, they’ll become even more oversold. The same dangers remain today as they did a few weeks ago, but the difference is that a lot of cash was used (and possibly burned) on heavy short-covering the past three weeks. The early reports from the larger hedge funds are that many were slightly down to slightly up last night and about half were down for the month with 5 trading days to go (based on last Monday’s close). Someone last night asked me how that could be, especially with the indices having a record month. My answer was they were heavily short anything and everything related to Europe (equity and credit) and they were scurrying to cover their shorts the past few weeks. Also, many equity mutual funds came into the month with higher than normal cash positions and they needed to “buy anything” in order not to underperform the averages.
The takeaway from this is that many shorts were covered, much cash was used by the long mutual funds and that ammunition is gone (short-term) for the market. Yesterday’s sell-off and this morning’s pre-market selling is a direct reflection of this.
To learn more about the Daily Battle Plan, click here for more information.
Larry Connors is founder of TradingMarkets.com