Stock Market Volatility: Hot Money Panicking Out, Then In, Then Out Of Markets Again

Had you left your market monitor unattended at 3:00pm ET on Friday, and returned at 4:00pm, you would hardly believe your eyes. But, by extrapolating the US equity market to the rest of the world (about $44 trillion), you would have seen that $2 trillion in global market capital was wiped out in a single hour.

In that closing hour, the DJIA (^DJI), S&P 500 (^GSPC) and NASDAQ Composite (^IXIC) plunged -4.71%, -4.77% and -4.50% respectively.

By the end of the day, the DJIA (-337.94 -3.82% to 8497.31), the S&P 500 (-38.00 -4.17% to 873.29) and NASDAQ Composite (-79.85 -5.00% to 1516.85) were down sharply. Yet at 3:00pm these markets had been higher.

By way of explanation, Talking Heads will delve into esoteric and ridiculous concepts like the previous day’s full moon, the debunking of Peak Oil Theory, the effectiveness of Nouriel Roubini and/or Marc Faber (take your pick), and other such nonsense that had nothing to do with the firing of the 3 o’clock gun that sank the market.

Jim Cramer opined (or is it shrieked?) that something big is going down this weekend, which boggles the mind that intelligent people would listen to that clap-trap. How is it, Mr Cramer, that the whole market - every sector - sank like a torpedo at the strike of 3pm, but after the close nobody could put their finger on the reason?

I have been around the market for almost 50 years - counting the time from when I first took (and passed) the home-study Canadian Securities Course, done in my Dad’s name because I was a minor, and personally couldn’t afford the fees at the time. I have never seen volatility like this.

There are some possible explanations, and maybe in combination there is a rationale. Who really knows? I do know that I refuse to get drawn into the discussion because it’s a fruitless exercise, and I will not waste my time.

But if you are a naval-gazer, I’ll throw out a couple reasons: (i) programmed trading run amok, (ii) effective spin-doctoring on CNBC, (iii) Nervous Nellie traders, (iv) profit-taking by quick and nimble day-traders, (v) naked shorts legally playing the ultra-short ETF’s, (vi) Humungous Bank & Broker (HB&B) prop desks ripping off the customers, and (vii) Mr. Market making an impression on Messrs Finance Ministers and Central Bankers of the G-20 who were arriving in Washington that afternoon.

Does all this really matter, however, if you, in fact, are clearly in minute-to-minute control of your portfolio — focused on risk management as well as ready to seek opportunity, long or short? Aha, there’s the rub. How many people can truly say they are in control? Not many according to the market.

And that’s the biggest reason for the volatility.

The Toronto Composite index also dived (-296.82 -3.17% to 9055.96), while the Venture Board (-11.98 -1.47% to 801.61) dropped a bit less.

In a total reversal from Thursday, which was a total reversal from Wednesday, there were no sectors remotely close to being winners on Friday. Whereas on Wednesday, the Cara 100 had zero winners and 100 losers, on Thursday that number reversed to 98 winners and just two losers. Friday reverted to just three winners and 97 losers.

One thing is for certain: there is no sector rotation underway; it’s just a matter of hot money panicking out and then panicking in and then panicking out of markets again. As Thursday and Friday showed, most of the panic is evidenced in the final hour. Day traders are licking their chops awaiting the final hour.

The worst of the sectors yesterday were Basic Materials (XLB -6.1%) and Financials (XLF -5.1%). In the industry groups, the Goldminers ($XAU), which had been up +12.7% on Thursday gave back -7.0% on Friday, as did the Airlines ($XAL). The biggest losing industry group was the REITs ($DJR -11.0%). Of course, $DJR was up the previous day by +11.3%.

The equity market has lost all functionality as a facility to properly price value and risk. Those who are using the market as an indicator of value and risk are changing their story by the hour, like clowns change their costumes. Don’t pay it no heed - as a lawyer friend of mine says here in Nassau.

On the day, $GOLD soared +$37.50/oz to close at 742.50.

$WTIC crude oil gave back -$1.46/bbl after the previous day’s gain of +$5.16/bbl. Traders tend to do that. The close was 57.60.

Do you recall my Friday morning DR when I stated, “Interestingly, that while there were zero gainers in the Cara 100 the previous day, yesterday saw 98 winners. Only DELL -2.2% and SBUX -0.2% were down, and the volume on these two was very high.” Yesterday, leading the winners was (drum roll please) DELL +6.0%. The previous day had been a set up. On the Street, it’s called fleecing the lambs.

Volume overall is quite weak.

On Friday morning I stated, “As expected, when money flowed into riskier equities, the bond market suffered. The $USB long bond dropped -0.91% to 117.02.” Even though the bond futures close at 2:30pm ET, and the equity rally didn’t start until 3:00pm, the $USB gained hugely by +1.31% to 118.55, which was in effect HB&B putting capital to work in bonds before they shorted the equities at 3pm.

I think the SEC needs to post human monitors on the trading desks at HB&B because this smells a lot like trading syndicates at work, which speaks to my point (vi) above.

The annualized US T-Bill yield hit a new low of +0.13%, which effectively means that HB&B is saying to you, put all your capital into stocks or bonds, whatever. You see, if you put your money into cash, they cannot steal it. So, today they have you right where they want you. They have sent every so-called ‘credible’ economist and Talking Head they can muster to make the rounds of Financial Entertainment TV to scare you out of your wits, causing you to buy those T-Bills, thereby driving the yield to zero. Then you don’t know where to go with your $4 trillion in cash (in the aggregate), which is the cash HB&B wants to get their hands on. They figure Paulson has bilked the US Treasury for a couple trillion and now his days are numbered, so why not take the T-Bill yield to zero. Of course it can only stay down there as long as the Fed keeps dropping its key lending Rate. Think about it.

Why do you think their Talking Heads are screaming at their Fed Head to drop the rates? [Italicized because this scam is all in the family.] If the Fed were actually working for the government and the people, they would be raising the rates to stop this nonsense. If you disagree, ask yourself what the zero Central Bank rate ever did to get the economy of Japan back on track? Paul Volcker and Larry Summers understand this stuff and I don’t think they have been bought-and-paid-for by HB&B. There are some good people out there you know.

I should be leaving this stuff for the Week In Review, but, you know, I get started and cannot seem to stop.

On Friday in the forex market, there was a lot of craziness going on. The $USD (+0.04% to 86.72) was stable, but then again the G-20 have all shown up in Washington, where their hosts are trying to put on a good show. Meanwhile the Euro ($XEU -1.26% to 126.04), Cdn Loonie ($CDW -2.11% to 80.83) and Pound ($XBP -0.59% to 147.39) got hammered while liquidity flowed back to Japan ($XJY +0.85% to 103.01).

In Europe at the close, the equity markets were up: French CAC +0.67% to 3291.5; German DAX +1.31% to 4710.2; and UK FTSE +1.53% to 4233.0. During the afternoon there, equity prices did come down between -1.0% and -1.4% following my morning report, but the European bourses were closed well before the 3:00pm ET debacle in NY.

Earlier Friday, the Asia-Pacific markets were stronger: Japan’s Nikkei 225 (+2.72% to 8462.4); Australia (+1.46% to 3726.0); Shanghai (+3.05% to 1986.4); Hong Kong (+2.43% to 13542.7); and Sensex BSE 30 of India (+2.43% to 13542.7) were all higher.

Spot prices at the close Friday (versus 9:03am ET) for gold, palladium, platinum and silver are, respectively: 740.65 (744.00); 214 (217); 838 (844); and 9.50 (9.56), are a bit lower on the day due to a firmer $USD (88.35 close, following 87.365 in the morning), but still higher than Thursday morning’s prices: 714.88, 208, 822, and 9.37 respectively.

DJIA futures closed Friday at 8371. To follow up my Friday morning report: “DJIA futures are at 8693, which indicates a small sell-off at the open, reflecting some profit-taking. The final hour will prove interesting. I believe the buying strength will become apparent.” My crystal ball was two-thirds right: There was an opening sell-off, and after gaining on the day into positive territory, the final 60 minutes exactly did prove interesting. But who would have seen that almost -5% sell-off coming - unless of course you were in the room with Paulson, Dimon, Mack and friends.

In the Community Chat on Friday, I noted that I would be removing Goldman Sachs (GS) from the Cara 100, which I’ll use the WIR tomorrow to announce a replacement. I’ll just say for the record that the response from this community was unanimous - they think the Goldman Sachs business model is broken. Many are hoping that Abbey Joseph Cohen shows up somewhere visible so that they can continue to trade against her (stated) opinions.

Nasty, aren’t I. Don’t shoot the messenger.

Have a good day.

Posted in Categories: Australia, Canada, Contributor, Eurozone, External Research, Japan, Stocks, UK, USA.

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