Exactly. First of all, let's try to get back to the discussion like the one above. This "TA vs fundamentals" and "well Gartman said this then" crap just ruins what could otherwise be a great discussion. I completely agree that what we're seeing now is different than what we saw last June '06 and this past Feb '07. A massive worldwide credit repricing was not a major issue in either of those previous cases. As some of you may or may not have been aware, the selloff continued after 4PM today in currencies, wiping nearly 100pips off the likes of GBP/JPY and other carry pairs. We know that hedge funds have short the yen in billion dollar amounts, used the leveraged proceeds in a variety of credit markets, and now are facing immense pain on both ends (their positions and the leveraged yen used to buy them). My hypothesis is that they're not fully hedged, nor are they even close to being out of these rapidly losing trades. Call me crazy, but I interpreted today's final hour selloff as on ominous sign that there is a LOT more damage left to be done. That late panicky action is possibly a big hint. My guess is we're going to see lights on in many Wall St offices all weekend, with those who are leveraged up on both ends trying to figure a way out of the relentless damage still to come. Thoughts or opinions?
Other late sell offs earlier this month were followed the next session by big up moves. It's difficult to read too much into them.
Mr. FSB, I certainly don't call you crazy, because you have wonderfully summed up what was going on in my head intuitively. The name of the game might be "contagion". Back in 1998, when "L"TCM went bancrupt, just the rumours of their bancruptcy were enough to cause an imbalance on the bond markets, that nearly shook the world financial system. Right now, we could have a similar, if not even worse situation. The current crisis seems to be based upon simply unknown (read: "fearful") derivatives risks; if subprime trading was a part of every major banks portfolio just like credit derivatives is, then one result of the current crash (yes, I've used the "c"-word) could be that the risk management departments are going to curb their exposure to the current market environments. IOW, they are going to restrict the position sizes and limits on other, even non-correlated markets, in order to proactively prevent future losses. "Portfolio insurance" anyone? Edit: Or what about "buyer's strike"? In order for prices to move dramatically into one direction, it takes a supply-demand imbalance. The crucial question is, whether that imbalance takes place on big relative volume or not. Right now, the subprime- and yen-carry associated risks or perceived risks could cause a chain reaction; trading parties would not just restrict their "long-exposure" (i.e. including private equity players) but also, that hedge funds loathing for shorting-opportunities would step in. If this is no financial dynamite, then what is...
No doubt this selloff is more bona fide than virtually anything else we've seen since 2002. For starters it's the first time in ages we've seen a hard break from 1) significant technical levels (i.e. a double top 2000-2007 in SPX) 2.) on heavy, heavy volume and 3. as you mention, off of real news not like a hurricane, bombing, China or some of the other bs "reasons" sellers temporarily overwhelmed bids in the recent past. The fractal that I and many others have used this summer is that of Jul/98. Perhaps subprime is LTCM. By itself neither is a huge tempest but in liquidity driven mania it only takes one displaced player to set off a frantic game of musical chairs. One of the things I found weird about 2000-2002 was except for 9/11 there was no single "crash" type day. The historic break was relentlessly brutal yet orderly. IMO there's a risk that in the next few days or weeks we'll see a 5-7% single day correction. Market Profile speaks of "longer time frame participants." They are the mass of folks who keep trends in place. Me thinks there's investors cashing in chips. At the end of the day the power of those folks is far greater than the limited pricing impact of us traders.
i agree. they are perfect fodder for TA freaks who... in reality this was probably a run for the stops (all right below 1460).. Now a whole new batch of 'TA freak' shorts are in the game after this close, who all have -new- stops around 1470. Watch monday do a reverse move. Think about it. EVERYONE is buying 1460 cash (ie 1470 area ES) with a stop pretty close to the entry. Its free money for big $$.
I know a lot of folks who bought the close on Friday October 16th, 1987. For all the same reasons. The following Monday was the last day many of them were ever able to trade again......
Some good ideas, but I find it fascinating that subprime tranches are trading at 40-45c to the dollar. I think there is a risk mispricing here... there must be. Thats saying that 55-60%of the funds of these loans will be uncollectable. Remember, subprime debt is collateralized against real houses. I would've loved to be that hedge fund who bought subprime credit default swaps at 100bp (or whatever they were) and now sitting on 4500-5000bp gains. Assuming EVERY SINGLE piece of debt in those subprime tranches put 0% cash down, and bought the PERFECT top, the market is pricing in a 60% price drop on these properties from the top. This sounds like a steal, and someone is going to make a lot of dough. wish I had cash to buy up and leverage ABX debt... I think the -shit- has already happened ... if you are reading it in the press, it has likely already played out. in the meanwhile, higher quality corporate debt has barely moved -net- when you consider long term treasuries have backed off 50bp in the past few weeks. as for junk debt, its only seen a net 100bp move (counting the treasury move). we'll all be reading about this in weeks to come as the overreaction that was a giant buying opportunity in disguise, for equity market buyers as well as subprime tranch buyers.
This is a fuxxing pimple on a gnats ass. When we get a INDU equivalent 1300pt intraday move....and the VIX goes to 46...let me know.