WASHINGTON, Dec. 15, 2015 – Conspiracy theorists are frequently mocked and ridiculed in the media, nearly always when they’re right of center—wherever the center really is these days. For that reason, the Maven tells you with both a straight face and a grain of salt that something weird is afoot on Wall Street this week.
After last week’s utter disaster in the stock market—including last Friday’s heart-stopping down debacle—markets are rallying Tuesday for the second day in a row. Good and hard. Sure, the “experts” say. Markets were way oversold, so we were bound to get a rally. That’s true in a way. But these same “experts” were telling us last week that fiscal Armageddon was close at hand and advising investors to sell everything and get out of Dodge.
What a difference a weekend makes.
That said, the kind of whipsawing volatility that has troubled markets this year, particularly since mid-summer, is wreaking havoc not only on individual portfolios but on hedge funds as well, driving—at least at the moment—a couple of key players out of the business entirely. Others may follow.
The cosmic problems that were supposed to concern us have been discussed in these columns before; namely, the crash in the price of crude oil and its wide-ranging ramifications; the uncertainty surrounding what the Federal Reserve will finally announce Wednesday at noon with regard to its interest rate policy going forward; and, unique to the current time frame, the expiration on Friday of a near-record number of options and futures contracts, an event known in the trade as “quadruple witching.”
This is a term that always confuses new and even many experienced investors, so let’s take a short break to define it, courtesy of Investopedia. Quadruple witching is defined thus:
The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock options contracts expire on the third Friday of each month and once every quarter – on the third Friday of March, June, September and December – all four asset classes expire on the same day. Because futures and options investors must close out of their positions on those days, they often witness increased trading volume.
Italics by the Maven. And, BTW, since the Maven himself is confused by the term “single stock futures,” having never traded whatever they are, let’s look that one up, too. That term describes
A futures contract with an underlying of one particular stock, usually in batches of 100. No transmission of share rights or dividends occur…. Behaving exactly like a futures contract, an [SSF contract gives] investors increased capabilities to leverage themselves within the market. Additionally, these products, unlike most options, can be traded on margin.
In other words, it’s just like a regular commodity futures contract, except it’s on a given stock. BTW, “triple witching” occurs during other months of the year and does not include these single stock futures contracts. Now you know.
Which gets us back to our main thrust. Why, all of a sudden, are happy days here again? Has Santa Claus come back to town after being thrown out of the investors’ saloon last week?
Who knows? Far greater experts than the Maven have lamented the breakdown of all traditional and logical trading systems in recent years and most particularly in 2015. Logic and value have become unmoored as the high-frequency traders (HFTs) have unfurled the Jolly Roger throughout lower Manhattan, and the machines are running up to 70 percent of trading now, based not on value but on newspaper headlines (often wrong) and pure rumor (generally misleading).
All this means one of two things: either the HFTs and their algorithms have drawn investors seriously offsides Monday and today, or we’re being suckered by the shorts into an incredible bull trap that will destroy us all sometime Wednesday.
The Maven’s take: Central banks are supporting markets (including oil futures) to keep things buoyant and to flush out the massive short-sellers (like the ones scaring us last week) to create a massive short squeeze into the Fed announcement and into quadruple witching.
Will this succeed? Who knows? We still have a batch of SDS and SH ETFs (double-short and short S&P 500 ETFs) covering what shares we have left, so we can try to hold onto positions we still like. Our preferred stock holdings are trying to recover. But given this is still 2015, Santa can still get sent to the showers at any moment and the market can still crash. As a result, happy as we are to see some plus numbers today, our only Trading Tip today is to stay out until we hear (or see) some kind of definitive all-clear signal.
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