Equity Index Update
Brad Sullivan
The index markets continued to suffer on Friday as buyers failed to materialize at levels around unchanged for the second consecutive session. Sellers took control through the lunch trade and became aggressive in the final 30 minutes of trading. It struck me that most of the selling done during that period was of “forced” nature. Whether it be risk managers or margin clerks, the bosses did not want the weekend risk and pushed out longs. Given our lower open today, that seems like a rather prudent trade.
This morning, the indices are called lower, -800 in the SPH7 at 1377.75, but off its overnight trading lows of 1371. The real volatility this morning seems to be lurking in the currency market which is absolutely up for grabs depending upon which cross you are trading. The Dollar is markedly higher against nearly all its counterparts, save the YEN…the YEN/Dollar continues to sink, the change being about +1% in favor of the YEN this morning. On the flip side, the Dollar is up over +1% vs. the Pound and nearly +1% vs. the Euro…the one thing each currency has in common is that they are all SHARPLY lower vs. the YEN. To put this in perspective, 5 sessions ago, the Euro/Yen cross hit an all-time high. Currently, we are trading -5.3% lower from that mark. Certainly, any levered product moving so quickly has the potential to inflict serious damage across the markets. We have seen the response in our index markets as funds are forced to exit long strategies on equities and short yen positions…an ugly mix.
The question now becomes…where do we go from here? How much more damage is left in the system? Is there systematic risk in the marketplace and if so is that risk not being accounted for (in implied volatility) properly? These questions are the larger ones and whichever trading theme one takes in response will yield either a tremendous bout of profitability or a painful loss…of course that is the point for choosing this business.One aspect of the trade that I try and remind myself of during this volatility is ANTICIPATION. I am reminded of the axiom that Bobby Knight used for his players…C.A.R.R.E. Concentrate Anticipate Recognize React Execute. Pretty simple stuff…but it works. In these markets many of the larger moves are actually quite orderly (Tuesday afternoon being an obvious exception). However, if you examine Friday’s action in the SPH7…we traded up to UNCHG at 1405 and eventually settled at 1385.75. Most of that action was steady selling with some spike program action involved…however, if you were selling low prints on the way down the market clearly tested your position, bouncing higher quite easily. The key with trading in this environment is to wait…wait until you see the “whites of their eyes” as one of my friends used to say.
