Never have I seen the market start off a decline with such volatility. This is a very bad sign. Usually we get the 500 point drop at the end of the decline, not on day one. Often the volatility and magnitude of the breakout at the beginning of a move serves to foreshadow the size of the move over the longer term. It serves to define the trajectory or slope of the glide path for the move. This is very scarry stuff as it relates to Tuesday's decline. If the down move is to last for another few months then something like 1300-1320 on the s&p would be my first target with another 500-1000 point drop toward the very end. When volatility increased by such a magnitude as it did on Tuesday, the first thought that came to my mind is that it was somehow a mistake. A trading error. An overreaction. A malfunction at the NYSE or the computers did something whacko with the ES. As if someone got a very bad fill with the S&P down 50 handles and it would snap right back by end of day, with everything getting better via a huge bounce the next day. And then the markets would calm down and it would be back to business as normal. Similarly to 2004 when GOOG went up 30 points from 140 to 170. My first thought was the market had done something dumb with GOOG and shorts just capitulated and all bought at once and $170 was somehow a dumb mistake. But here here GOOG sits above $400. And here was are 3 days later and the guy who got the worst possible sell fill on Tuesday is still a happy camper. And everyone who bought the S&P down 39 handles on Tuesday never got a chance to sell for a profit and is now down an additional 15+ handles. It now sinks in that Tuesday was not somehow a volatility "Mistake". But perhaps the beginning of a new ERA. Now that it is the weekend, we have time to think about some of the fundamentals of the world and it all seems very nasty. We see that an entire lair of the mortgage market is now wiped off the map. We now realize that even the blue chip financial stocks could have high levels of exposure. Brokerage houses credit spreads have gone way up and realize that many of our favorite broker names are bigger players in subprime than NEW and NFI. It then sinks in that those million share block trades on the brokerage stocks from Tuesday was the smart money getting out and now some of us are still hold them points lower. How will any of this get better any time soon? Seems likely that there will be more and more bad news and it will be worse and worse. Such as friday nights' New Century all but done news. So maybe our favorite financials and the S&P can bounce some. But that may be all we can hope for. Also with mortgage rules getting tougher and subprime off the board, how does the housing market not fall to the next lower level? Especially with all the foreclosures about to hit the market over the next 6 months. I would never want to advise someone to get overly bearish or bullish on a message board. Because at the end of the day i'm smart enough to at least know that I know little. But everything tells me that this is a risky time to be doubling down on long bets or to make a large play that this is the end of the correction. That is at least the mindset I'm going to be trading off of. Not going to do anything stupid by betting huge the market won't keep sliding or tripple down on losing longs. Likewise, can't add to any shorts without some sort of bounce or time duration of going sideways. These are my random musings. Good luck.
They only lesson I got was at 3.00 pm on the first day, when the market moved 250 dow points in 5 min. Electronic trading will make a 1987 crash look tiny ! I expect a bounce or more when 200 day MA on INDU is hit. This last rally had less volume, its was to fast and steep, the next move up will be more solid and traditional ( volatile). This is a A, rally for the B, and a plunge for a C !! Also the GOLD sell off was hedge funds getting cash for margin calls on stocks...
Silk, Excellent post. I agree with much of what you have said. This market reminds me of the markets of the late 1990's with LTCM and the Asian contagion. In recent years, I believe that the heightened dominance of hedge funds in the financial industry has led to ever reducing volatility. This volatility reduction has been created as the funds would continually step in front of one another trying to get the a trade (bidding higher or offering lower, dampening movement), leading to lower and lower profit margins and potentially higher levels of leverage to maintain returns. While this has made for a tougher environment for independent traders, IMO, this has enabled the hedge funds to continue to books profits, albeit less than in past years. The trouble, however, is that while independent traders can be nimble and mostly unconcerned about liquidity issues in the markets they trade, the hedge funds need to put on massive trades in order to generate decent returns on the asset levels that they manage. As a result, when the hedge funds become frightened into moving to the exits, they can trample on another trying to get out the door. I believe that this is what caused the snowballing of the selloff on Tuesday, and further Yen strength seems to be doing the same to the Yen carry trade and subprime mortgage markets. As more traders exit, the move becomes a self fulfilling prophecy, as their exits cause the markets to continue to move in the same direction. These large fund positions cannot be easily unwound, since with their position size would sharply exaserbate the decline if they tried to exit their entire positions quickly. As a result, while the hedge fund dominance may have caused a reduction in market volatility in recent years, in situations such as these, the hedge funds will lead to an increase in volatility much greater than would have occurred without their presence. Their fear and position flattening will not so much be to take advantage of market volatility, but will be the cause of increased market volatility. I only hope this increased volatility continues for a long time.
I really hope that a lot of these hedge funds get caught up in the mix. In the last decade or so, the hedge fund industry has gotten huge. There are now tens of thousands of hedge funds, everyone wants to start one because its the way to make quick money. Take 20% off the top regardless of whether the fund beats the market or not. The majority have no clue how to trade. Our ability to jump in and out of the market with relatively low slippage is our biggest advantage over them. Those hedge funds that have been just buying on dips for the last few years or have a primary strategy of selling options and volatility better adapt or it's game over.
I believe he meant in the DOW not the S&P, or if he was refering to the S&P it would mean 500 or 1000 ticks.
Yeah. I've just examined this drop in the Dow, S&P and Nasdaq technically and it looks like shit NEVER have I seen it this bad since the late eighties! Check out the down volume compared to the up volume! I reckon this is a 15-20% dump Having Bush around certainly doesn't help Lets spend our way to defeat in the Iraq war LMAO (if it wasn't so sad)
Agreed Businessman. A hedge fund going public - we may yet look back some day and say that this IPO called the top the market - or at the very least, the lowest point of volatility Are any of these hedge funds truly hedged - LTCM were "the smartest guys in the room"