Friday, May 29, 2009

Schizo Market

So everyone is going to be wondering what caused the market to surge in the last 15 minutes of trading. The answer is nothing but futures buying. Going into 2:45 about 1.5 million futures contract traded. In the final 15 minutes this got up to 2.0 million. 25% of entire volume of the day traded in the last 15 minutes (most of that was in the last 10 minutes). To show how light that 1.5 million is, normal days (like the May normal which is way down from normal normal) is 2.2 million ish. Normally around 2:45 you are around that 2 million to 2.1 million mark. So BAMMMM. The futures start getting bought like mad dragging the whole market up. It is insane. The hidden buying force isn't buying stocks which pushes the market up, it is futures. It isn't some fundamental change in the market, it is futures buying. One way to tell this is to see the spread between the future contract and the S&P 500. Futures have been trading a 1 to 1.5 points lower than actual S&P 500 value (future at 910 and S&P at 911.25). When the market is getting pushed higher by the futures, this relationship becomes extremely strained. The gap closes with this huge tension as the market isn't wanting to buy stocks but is being forced to by the futures buying.

The way this permeates of course is a force into SPY buying (the etf of the S&P 500). This then trickles down to stocks. It is a sick game that computers are running at this point.

Check out this graph Look at the huge spike in volume in SPY at the end of the day.

The problem with all this, is what is reality??? This close at the end of day was absurd. Nothing drove it but we broke resistance because of it. Was that an actual break or a few computers who decided to go berserko at the end of the day. If we don't open down hard on Monday morning it won't matter. The momentum technical guys will start getting involved in the mix again. All this doesn't matter from a long term bottom up value investing perspective. Butttt, if you believe like I do the market has another massive drop ahead of it then it does matter because you can't just sit on shorts. That is why shorting is so hard. If you believed the market was undervalued and heading higher then a break to the downside in resistance matters much less. You bets become smaller as the markets drop. Assuming your right it is often times better to drink a margarita by the pool. You have a chance to dollar cost in. On shorting it is exactly the opposite. The shorts become bigger problems.

I am out. May be back on here this weekend. I don't know.

1 comment:

Anonymous said...

Denninger speculates that the runup on the close might have been a huge short being forcibly closed out.