WASHINGTON, October 14, 2014 – Not much original to say after yesterday’s negative blowout, which suddenly occurred after a hopeful morning ramp. The “buy on the dips chant,” or—in some precincts, the BTFD (“buy the effing dip”) rule—seems to have given way to the reverse, with any half-decent rally getting drowned by selling of massive proportions.
Yesterday’s action was no exception. Hopeful buying occurred in the morning, but gradually gave way to modest selling, all on relatively low, semi-holiday volume. But all this, apparently, was too calm, too orderly for some rambunctious HFT outfit or hedge fund whose pilot (or pre-programmed supercomputer) decided to destroy Tuesday trading by unleashing a colossal tsunami of selling that utterly destroyed all three popular averages.
ZeroHedge had the figures not long after yesterday’s close in a note entitled, “This Is What Happens When Someone Is Desperate To Sell $750 Million Of Stocks”:
At 1532ET today (Columbus Day – with half the market absent), someone – apparently having waited to see if the almost ‘ubiquitous’ 330pm Ramp [aka, ‘The Buy Program Express’] would occur – decided it was time to dump three-quarters of a billion dollars notional of US equity market exposure in 1 second. The results of this forced liquidation (or utter disregard for fiduciary duty) were as follows…
A complete collapse of all liquidity in the S&P 500 e-mini futures contract – the world’s most liquid equity exposure vehicle…
A helpful tweet gave us a more specific translation of what exactly transpired:
The liquidity evaporation began at 15:32:37 after 4,492 eMini contracts were dumped in 28 milliseconds
In other words, some undoubtedly evil twit with a great sense of humor but with no sense of fiduciary responsibility overwhelmed the market’s closing half hour by dumping huge number of futures contracts that necessarily set off a wave of selling that couldn’t find matching buyers on a slow trading day, effectively causing the underlying S&P 500 stocks to massively sell off on whatever rapidly declining price they could find.
The transaction was clearly premeditated and intentionally timed to drive averages down far enough to achieve breakdown velocity, perhaps helping out even larger short positions in the process. Everything took it on the chin except, no doubt, the evil or thoughtless clown or programmer who directly or indirectly flipped the switch.
When you get this kind of volatility, it drives people out of the market, further damaging liquidity and further helping HFTs pull more stunts like this one since few remain to oppose them, knowing that the metaphorical dice are loaded against them.
So it’s not surprising that the VIX, that popular stock market volatility measure, also spiked yesterday to levels not seen recently: a clear signal that the rapids are dangerous if you don’t have institutional trading experience.
Our big short position largely protected us yesterday, although we pared it back a bit this morning. Markets are now quite oversold, short-term, and the market has tried twice to mount a big rally Tuesday morning, only to get slapped back by more selling.
We’re up around 118 Dow points at around 11:30 a.m. EDT Tuesday. But with more crooks like yesterday’s buccaneer hanging around, we wouldn’t get complacent. Another core dump could happen at any time. When it comes to this kind of selling, it’s best to observe the Yogi Berra Rule: “It ain’t over ‘til it’s over.”
Another thing that’s been creeping out the markets is the increasingly obvious attempt by the Saudis to continue the all-out pumping of their massive output to drive down the price of oil severely and rapidly. In only about 8 weeks, West Texas crude (the usual U.S. benchmark) has dropped from around $100 per barrel to $85 or so this morning, with indications that it’s going lower.
Why would the Saudis do that? Doesn’t it hurt them? Maybe. But, unlike our current non-Administration in Washington, the Saudis are on the ball when it comes to supporting their own national interests.
Sure, the Saudis, too, will take a short term hit in their own overflowing wallets by putting continuing pressure on the price of oil. But in driving prices down, down, and down, they hurt the Iranians, the Venezuelans, and arguably Putin and his fellow Russian thug-o-crats, all of whom have steadfastly antagonized the Saudis for decades.
Further, the Saudis are also firing what could be a painful shot across the bow of those wild and crazy U.S. frackers and the vast, new oil supply they’re uncovering. It’s more expensive to drill for and pump this stuff than it is for the Saudis to extract their black gold, since our Arabian friends merely have to send down a few pipes into their under-the-sand lakes of fuel and out it comes.
By driving down the selling price of U.S. oil obtained via unconventional methods, the Saudis can slow down the drilling or stop it altogether, thus causing oil prices to rise once again to where the Saudis want them. With friends like these…well, you know the rest.
The Saudis obviously preferred that not too distant time when we had to buy much of our oil from them at whatever prices they preferred. They’d like to take us back there again.
Typically, we’re not seeing this massive oil drop reflected proportionally at the pump. Prices at the pump go up in nanoseconds, but they drop ever-so-slowly.
Here in Reston, Virginia, not far from DC, pump prices were still hovering around an expensive $3.33 per gallon or so. Two weeks ago, when we visited with out-of-town friends down in Orange, Virginia, not far from Charlottesville and Monticello, prices were better, around $3.05 per gallon.
We wouldn’t be surprised if in some places across the U.S., prices have dipped below $3.00 a gallon. But in all places, they should be much lower by now, proving that pricing methodology is rigged, and that oil companies love to extract even more money from jurisdictions they think can afford higher prices—like this one—and then using these overcharged profits to subsidize pump prices in areas with less favorable financial demographics.
This is the way the oil companies have, for decades, kept liberal politicians off their backs for the most part, namely, by redistributing income at the gas pump. It’s yet another of those countless examples of crony capitalism, yet nobody seems to care. Particularly the jurisdictions that get the subsidies.
At any rate, with the HFTs, hedge funds, Wall Street buccaneers, and overcompensated investment bankers running the show and likely keeping the Fed at bay until they figure out their next moves, this market, at least for now, is no place for either you or the Maven. It’s just too treacherous, and our once reliable indicators and barometers are now lying to us at least half the time. The house is winning more than its fair share, so we need to stop playing for awhile until they cut it out.
We are about 65% cash now in all portfolios, paring back to holdings that primarily include preferred stocks, a few select REITs, and some ETFs targeting specific indexes. Plus a few bonds, of course. We don’t intend to get back in again in any big way until the BS-ing stops and the SEC actually decides to do its job, the latter of which we won’t hold our breath waiting for.
Just stay out and let the hedgies, the HFTs, and the 1% have their fun. If you’re mostly out, they can’t confiscate any more of your money than they already have. That’s small compensation indeed, but we’ll take what we can get.