What Refco means for this market

From the Betty Ford Put

In the movie “The Shining” there is a scene where
the little boy is wandering around growling “red-rum, red-rum, RED-RUM,
RED-RUM!” Which of course was “murder” spelled backward. This scene has popped
into my mind because I am seeing and hearing a lot of traders wandering around
growling “REF-CO, REF-CO, REF-CO, REF-CO!”

It is easy to blame Refco
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everything, and the media always finds a scapegoat when the market is going
down, but the fact of the matter is that this market had it coming anyway. How
all of this plays out is anyone’s guess, but a significant amount of liquidity
has been pulled away from the market.

Refco and its many subsidiaries had a lot of
proprietary traders. They were a large and active presence in both the cash and
futures in equities, fixed income, FX, commodities, you name it. Most of these
people are now on the bench. Maybe it is temporary, maybe it is permanent, but
the liquidity provided by these traders will be missing for a while, and less
liquidity = higher volatility going forward.

Yesterday was a mixed bag. The semiconductor and
biotech sectors led the Nasdaq 100 back above its 200-day MA:


While the S&P 500 and the DJI continued to
flounder, they did put in the type of day that a candlestick chartist might find



I would like to emphasize the “temporary” part.
Yes, the VIX is “overbought,” and there are a gazillion “oversold” signals
happening, but this market is heavy, and until further notice, bounces will need
to be sold. Next week will be a great litmus test. Conventional wisdom is that
earnings will be great. I hope they are. What I will be watching closely is the
market’s response. If we have great earnings, and we don’t rally, look out!

Joe Corona

Joe Corona is a 23-year veteran trader who makes his living
trading options
and other derivatives. Mr. Corona has been a floor trader on numerous exchanges

including the CBOE, CBOT, and CME. Joe most recently spent 4 years as Head
Trader for Market Wizard Tony Saliba at Salibaco, a proprietary trading firm. He

has also been an options instructor for the International Trading Institute
where he has trained hundreds of options and derivative traders for major
institutional trading desks worldwide. Joe is the Director of the Asia Pacific

region for CDLS Consulting, LLC which specializes in trading U.S., European, and

Asian options and derivatives.