An interesting take on the INDU, from an exchange I had with someone last night. Posted here verbatim:
"The key as to when the DJIA may fall lies with the Index Funds. Their ability to purchase the DJIA futures (force them above "fair value") and to entice arbitrage trades depends upon their flow of funds from investors (positive or negative), the current position (average cost and margin debt outstanding) of their DJIA futures, and the amount of their bank borrowings (in theory for redemptions).
"Neither the SEC nor the Fed cares what the funds use their borrowings for as long as the DJIA survives. Based upon the present "near contract" on the futures, which expire on Sept. 1 or abouts, and the past "near contract," the funds should have an average cost somewhat above 10,500 for their futures contracts. Given the funds general margin positions against the futures, the main factor could be redemptions, particularly if the DJIA does not go much above 10,500 before Sept 1. These figures, flow of funds, are sometimes published by one or two organizations. If the funds sustain large losses on their futures contracts and face redemptions at the same time, the DJIA could fall at least 30% very quickly.
"There were stories from some Hedge Funds that the markets were saved in March by several large purchases of futures contracts by the Bank of Japan (BOJ). True or not, it expresses some traders feelings that the game is not straight forward. However, given a week or two of substantial redemptions from the Index Funds, probably no intervention would help." |
