Equity Index Update
Brad Sullivan
Driving into work this morning I was listening to a local Chicago radio station when the news report came on and the pre – news conversation turned to yesterday’s decline in the equity markets. This show is anything but serious and I was struck when the star of the show said his brother was a stockbroker and how he wanted him to buy during yesterday’s decline. This prompted the news reporter to talk about how traders woke up to the Asian bloodletting yesterday and just kept on selling…but it will come back, like it always does.
Normally, on the heels of such a whipping, I reverse course and become a buyer…and I was up much of the night trading on that very theme. However, those were trades to take specific advantage of the enormous discount we settled at to fair value yesterday across the index board. That trade has played out as the indices are called to open sharply higher from settlement, but around their respective fair values. Now…things become a bit more difficult. Certainly, I was a bit surprised to hear such complacent talk after a -4% decline on the morning radio. Could this be a sign that there is more to come on the downside?
It is worth noting that the SP minis traded a whopping 3.5 million contracts in yesterday’s action…that equates to the single largest volume session in this contract's history by nearly 50%. In addition the volatility that captured the market after the much discussed computer glitch in the DJIA calculations seemed to catch everybody searching for answers. There is no question that the move was heart wrenching to the downside, but after watching Cramerica last night, I have to wonder if there is not just a little too much cheerleading and explanation of the decline for there to not be more – and potentially much more behind this downdraft. I remain steadfast that this move picked up acceleration with the strong drop in Yen/Dollar and the unwinding of the infamous Carry Trade. As I write this…the Yen is rallying to highs for the session vs. the Dollar and the index market is buckling. It is and will continue to be the number one indicator in my book moving forward.
As for the session today…expect HEAVY doses of volatility and whatever you do…don’t get caught selling bottoms and buying tops because the reversals are lurking behind every tick. I suspect we will have an inside session…most likely inside the final two hours of trading from yesterday. Keep in mind that there will be lots of gunslingers hitting the trade today…utilize a strong plan to stay out of trouble.
