That was a Bad Inning
In a "Baseball Season of Frustration," investors can certainly expect a bunch of strikeouts, caught stealing, and walks by the pitcher. Yesterday's entire trading session was one lousy inning of baseball highlighted by some very wild pitches.
Let's be clear about yesterday. Before the 2:40 pm freefall occurred, this was a market teetering on the brink. The past few sessions have lacked the capital flows that prior months have experienced in the early days of the new calendar month. No longer is it enough for small caps and junk names to continue to advance the market by themselves. The market also is properly focusing on the Greek funding woes, social unrest, and, I think more importantly, questioning the credibility and existence of the European Union.
S&P 500 INDEX MAY 2010
S&P 500 INDEX APRIL 2010
S&P 500 INDEX MARCH 2010
The sun has risen here on the East Coast this morning Friday, May 7. Quickly, let's highlight that we survived the overnight Asian market trade without another precipitous selloff. The market now awaits the release of the April Unemployment report, less eagerly, unfortunately. This report should be viewed as a major decision maker. However, similar to the earnings release of Goldman Sachs and Transocean, the fundamentals become insignificant relative to the negative headlines So, unless we mysteriously create the 8 million plus jobs we have lost since January 2008, I would expect a collective mild "yawn" after the report.
The Battleship has unfortunately begun to turn; the choppy waters ahead are forcing the course to change. Once that big Battleship turns it is rather difficult to turn back to its prior course. It doesn't mean it will not, it just means that time is needed. Something tells me, trader instinct maybe, that the market may need to revisit below 1100 in the S&P 500 Index again before a change back to our Battleship's original course is considered.
What rests below 1100 in the S&P 500 Index is 15 minutes of 1987 market dislocation. Yesterday, an off day for me on Fast Money, quickly became a working day on Fast Money, Kudlow and the 8pm CNBC market special. By the way, I find it amusing that all the 2009 Bear prognosticators emerged from hibernation yesterday on CNBC.
So, let's talk for a moment about the 15 minutes of dislocation. Was it a "fat finger?" If it was, Dell has an opportunity to boost earnings power with the creation of the traders' keyboard that moves the "B" far away from the "M" on the keyboard.
Was it a liquidation of a major fund or a defaulting sovereign? I doubt it. If the answer is yes, then the manner in which the liquidation occurred was amateurish at best.
My belief is that significant stop loss orders rested below the market. Those stop loss orders are placed in the "easiest out," the Miny S&P Futures. The level where "protection" was most likely sought was 1125.00 in the Miny S&P Futures. As is evidenced below, significant volume was established once the market broke below 1125.00 and a precipitous decline unfolded toward 1056.00 in the Miny S&P Futures.
Miny S&P 500 Futures Intraday Price Action Thursday May 6
But here is the grand conundrum. The advent of ELECTRONIC TRADING has created an environment where in times of market stress price becomes dislocated from reality and valuations. The force of algorithmic computer programs momentarily places our markets in a perilous place. We have a serious problem with how far technology has advanced. I suggest that certain models that have worked for many decades need not be continually tinkered with, as we have with the introduction of electronic trading. Trading floors are now ghost towns along the once flourishing Route 66.
Collectively, as a trading community, we need to heed the warning from yesterday - this will happen again and again if we don't properly address the situation. Wall Street financial regulatory reform will happen, with or without good ideas from those of us on the Street. For the good of our industry it should happen WITH our ides. Otherwise, the continued Main Street vs. Wall Street divide grows bigger. High frequency trading is NOT what investors should be exposed to.
The Battleship began to turn on April 16th with the SEC / Goldman Sachs announcement. It has continued to turn with each picture of the oil spill in the Gulf, with each politically motivated question a Senator asked the management of Goldman Sachs and, as the next few days play out in the main stream media, further trust will be lost. Battleships should turn on poor fundamentals, not lost trust. This is what a "Baseball Season of Frustration" looks like. I don't like it either. I can't wait for my Thanksgiving dinner - we should be feeling much better then.