Thursday, May 6, 2010

Financial Thunderdome Back on

Quite a crazy day in the markets and there's a lot to go over even though the possibile explanations and theories about today are endless, and all that matters is tomorrow and Monday's price action anyway. Above are hourly charts of the S&P cash index with the candlestick chart charting the complete intraday moves in the market, and the line chart just printing the index on a closing basis to ignore the wild swing in the middle of the day. You can that under both counts we had a big selloff today with it obviously composing some type of wave 3. So "glitch" or not, today's action was very bearish and fits into the current wave count, which I labeled in the simplist and easiest way possible for now. I can easily see wave (iii) extending further down on the line chart tomorrow and/or Monday to complete better looking subdivisions for the wave though. We'll see.

So what the heck happened today? Well the selloff had 2998 stocks on the NYSE close down with only 173 close up. So that's over 17 stocks closing down for every 1 closing up. Volume was also huge at 2.5 billion shares when we've been seeing about just above 1 billion shares traded a day prior. Of that total volume, 95.6% was to the downside. So it was "crazytown thunderdome" on steroids today.


So the chatter on the financial news is that it was a "maching glitch" or a "fat finger" that made a mistake on a trade which triggered a domino effect across the markets for the 1000 point Dow selloff today. This is possible, but I'm not fully buying into that just yet. Ultimately, tomorrow and Monday will let us know what the market really wants to do: if the market takes back today's losses and rallies higher and higher, then it was probably just a glitch or trading error that caused today's steep selloff. But if the market charges lower and especially if it breaks beneath today's lows, then I highly doubt any error was made at all. I wouldn't doubt if a big fund(s) or bank bailed out of large positions because they see the wave [3] or C coming and the public is being told this "glitch" story to prevent public panic and Congressional and/or SEC scrutiny. But I have no evidence of that, it's only the conspiracy theory part of my brain thinking that. Tomorrow or Monday we should know the answer to this great mystery.

But if you're like me, then tomorrow is an eternity away, and you want to think about what happened and come up with your own conclusion beforehand. So let's logically run through this. The reason I have doubts about a glitch or fat finger causing the ENTIRE problem today is because of the following reasons:

1) The market was already under a lot of pressure from Greece and China and other European drama (PIIGS - Portugal, Italy, Ireland, Greece, Spain) before the selloff. It's not like this happened just out of the blue on a normal trading day.

2) I've heard mixed data in CNBC articles stating originally it was a Proctor and Gamble (PG) trade through Citigroup that caused this, and I've also heard that Citigroup made an error selling S&P futures contracts. But other articles state that Citi cites no trading errors, NYSE cites no errors either, and the volume numbers from Citi don't match up right with the selloff in question. So what's the real story here? And with all the technology and tracking we have today, how is such a huge trade that would cause a 1000 point selloff so hard to track down? It shook the financial world there for a while, don't you think they'd be able to track that down? So why is it all such a mystery even hours after the fact? Very suspicious.

3) It's a little too much of a coincidence that this "glitch" occurs at the same time Greece is in turmoil, China is struggling, Portugal, Italy and Spain are next in the debt monsters crosshairs, and the European Union is imploding? I mean of all times for a "glitch" selloff to occur it occurs now? Possible, but a bit too convenient perhaps.

4) If this was just a glitch then why wasn't it identified by the market and prices bid up to "pre-glitch" levels. Let's not forget the Dow still closed down 350 points, and the futures are still down. If it was a glitch, wouldn't this be a great buying opportunity? But so far, the big shots and smart money aren't participating. Why not? If it's just a clitch and it's now all but confirmed to be, why isn't the market skyrocketing higher?

5) Notice the below charts of some of the currency majors. They too fell with the stock market. Why did they fall with the "glitch", and more importantly, why haven't they fully recovered to pre-glitch levels now that everyone knows it's an error. The currency market should be much more resilient to a glitch than any stock market due to the massive size and liquidity. So what's going on here with currencies?

I'm not an expert on how the minute details of market functioning, so please tell me where I'm wrong on any of the points above. These are merely things that raise doubt in my head as to this whole "glitch" thing we're being told. It may be true, sure, but the markets will give us the answer soon enough. I'm sure Prechter already has his answer. I remain short and cannot confirm that wave [3] or C is underway since the market did recover substantially into the close. However, if we revisit and exceed today's levels in the coming days, and especially if we break 1045 soon, then I'd be comfortable stating that it is highly likely that wave [3] or C is underway and I'd be looking to get aggressively short at that point. So let's see what tomorrow and Monday bring us.

I welcome anyone's thoughts, opinions, criticisms, and data on my post today as well as on today's market action. Thank you!

Why did currencies fall victim to the "glitch" too, and more importantly, why haven't they recovered to pre-glitch levels?



Anonymous said...

Hi Todd

I sometimes visit your blog and another great post tonight.You have asked many of the same questions I was asking myself.Especially the FX moves.That is what got me..I mean intraday the euro vs JPY went from 120 ish high to 110 you said the fx markets are liquid but that happened.Something more than a glitch is up here.If the market really does tank then JPY goes to the moon!
Nice blog Todd.Really like your thought and analysis


Shrihas said...

I expect markets to bounce back at the same time "glitch theories" are floated to keep confidence.

Pattern is similar to 2008 January. All developed markets fell but emerging markets proved resilient, initially.

Six months after, in the same year (2008), developed markets also fell and also emerging markets.

In my opinion, one should not rush to short stocks at the moment. I expect S&P at 1190 again. May be one can start shorting then.

agnes said...

Hi Todd

Which ETFs would you recommend to use to play the $/EUR trade?

I have found: UUP, UDN, ULE, EUO, FXE

Which ones do you suggest?


Todd said...

Craig, thanks for the comments. The JPY is definitely tied to the stock market and although it has been dropping steadily after the "glitch" event, it still hasn't fallen back near pre-glitch levels. Quite a wild day again today. And the action is not consistent with a healthy market, let alone any king of bull run. But that could change with a raging 300 point Dow rally.


Todd said...


Interesting parallel between emerging and developed markets. If the S&P does get to 1190, then I'm a seller for sure.


Todd said...

Hi Agnes,

I don't like ETFs for currencies because there's just not enough leverage to profit in them due to their small moves. But that's just me. I trade the spot market instead. But if I did trade an ETF for currencies, I would be more inclined to use the UUP. I think the dollar will be the reserve currency that people flock to in times of crisis so it should be one of the biggest beneficiaries, next to the yen, during a major sell off.