Monday
U.S. equity markets are scheduled to re-open Monday, after being idle four
days following this week’s terrorist attack. The results of dry-run computer
systems testing this weekend will determine if in fact the markets will open as
scheduled. As of this writing, all options exchanges are scheduled to be open on Monday, and with the exception of the Nymex, which has yet to announce plans definitively, all futures exchanges.
We will keep you updated of any changes.
No doubt this open will be watched closely, with investors and traders debating
the possible scenarios that may unfold. The action overseas markets indicates a
bleak day Monday, and plenty of volatility for the rest of the week. A large
sell-off at the open–possibly 300 points or more–is likely, but the severity
of the drop also may be diminished because of the delay in the markets
opening. Keep in mind that a large drop at the open could, at some point Monday
or Tuesday, be followed by a tradable bounce; the day after the 1987 Crash we
saw a very large one-day rally.
History provides some guidance as to how the market reacts to war and acts of
terrorism. For instance, following the attack on Pearl Harbor, the Dow fell 7%
in two days; after the Iraqi invasion of Kuwait the Dow fell 2% the same day.
The day after the 1993 World Trade Center bombing, the Dow dropped 1/2%.Â
Interestingly, in every case, after one week, the market was up.
European shares dropped this week–slumping to November 1998 lows–which may
give some indication of what we in the U.S. might expect next week. After
gapping down between 5-10%, many indices rallied before falling again. Germany’s
Dax slid 12% for the week, and France’s CAC 40 was down 11%.. Dow Jones Europe
Stoxx 40 fell 5.5% today, to 3103.08. Tokyo surged 4.1% Friday after plunging
earlier in the week, and closed above the psychologically important 10,000
level.
So how do you trade next week?
We go into the week in an oversold situation, but remember that oversold
markets can always become more oversold. Also, rallies in bear markets can be
strong and powerful, so there is money to be made on both sides. For specific
trading strategies, read the trading lessons by Kevin
Haggerty and Tony
Saliba.
When you approach a market that has this degree of panic, realize that it is
rarely a clear-cut trading situation. Take what the market gives you. The market
rarely does what is anticipated–be prepared for the unexpected, as well as the
expected.
The possibility always exists for a surprise Fed rate-cut announcement, which
should provide bullish impetus to the markets.Â
Finally, the CBOE announced there will be no change to the regular September
21 option expiration date, but the New York Board of Trade will be
extending options expiration by two days.