Koko, this might be part of the answer . . .
Voltaire, is this akin to your "house manipulation"?
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The TaskMaster
Prime Suspect: The Futures
By Aaron L. Task
Senior Writer
1/25/00 10:38 PM ET
URL: thestreet.com
Looking Back and Ahead to the Futures
SAN FRANCISCO -- Forget about earnings and Alan Greenspan for a moment: Let's talk about the futures. Hopefully, this will be nothing like that conversation with your father -- or mother, or guidance counselor, clergy, etc. -- back in high school that began:
"What do you want to do with your life?" (FYI: "I want to rock" was the preferred answer for Reagan-era kids.)
So last night I whimsically stuck it to my media counterparts for using the all-purpose "interest-rate worries" to account for yesterday's selloff. The generic phrase provides a great fallback position but, rest assured, no one is going to attribute today's comeback to the idea that "interest-rate worries" have suddenly evaporated. (Are they?)
But while I knew interest-rate concerns didn't really cause Monday's "massacre," it wasn't until today that I fully appreciated what did. Which brings us back to the futures.
Yesterday, there was "capital put up [in the futures] to beat markets down and start a stampede to the downside," said Edward Gurin, president of Thermopylae Group, a Manhattan-based privately held asset management and investment banking firm. "There was no ambiguity. It was a highly concerted, measured [and] a calculated risk."
In an email this morning, Harry Schiller, editor of the Short-Term Consensus Hotline, noted the S&P 500 futures' failure to breach their Jan. 13 high of 1467 Monday morning triggered sell programs. "As traders saw their profits being eroded like waves knocking over a sand castle, they rushed in scooping up what they could salvage [of said profits] before there was nothing left at all," he wrote. (I think he meant "like sand castles being knocked over by waves," but you get the picture.)
When the market falls short-term for no apparent reason, "it's almost always going to be caused by the futures," Schiller said in a phone interview today. "If you push the futures down, the market will go. It's the tail wagging the dog."
The market-timer noted the premium between the futures and S&P 500 cash markets was "very narrow" yesterday -- around 8 or 9 points vs. more than 10 typically. That triggered sell programs by arbitrageurs who buy the futures because they're "relatively cheap" but then sell baskets of stock to offset the risk of being long the futures.
Tuesday evening, the S&P futures traded as low as 1416 on Globex -- down from the Chicago Mercantile Exchange close of
1418.60 -- vs. the cash market's close of 1410.03. The Globex market decline was due to a sense earnings after the bell were "slightly negative," Schiller said, noting Qualcomm (QCOM:Nasdaq), which tumbled in after-hours activity. He expects the S&P cash to open down slightly Wednesday morning to reestablish a more normal spread between futures and cash. (Then the game begins anew.)
But enough about tomorrow, let's get back to today. Once again, stock proxies oscillated wildly for seemingly no reason.
"There's nothing behind what's making us rally to this degree," Gregg Schreiber, vice president of institutional futures sales at Bear Stearns said around 3:45 p.m. EST. The S&P 500 futures traded as low as 1398 Tuesday vs. the prior day's low of 1403.70, he noted, suggesting the selling should have accelerated rather than disappeared. Thus, the reversal was "completely absurd" and "perplexing."
The admittedly bearish trader attributed the turnaround to the "buy the dip mentality" and dubbed the "whipsawing" action "the early sign of a long-term top."
Gurin, meanwhile, suggested the reversal was a function of sellers unwilling to "hurt themselves to press their advantage." In their absence, the "natural buoyancy of our highly speculative market seems to have taken over."
That version of the "more buyers than sellers" adage may sound like a wise-ass answer, but consider his theory about yesterday's action being caused by a concerted effort among a few players. Even before the market's about-face, Gurin wondered if those with bearish leanings would have the wherewithal to continue to risk capital (if not the capital to risk) for additional attempts to undermine the market.
If Wall Street is like war, it's fair to say the bears have lost many "open field" battles with the bull market in recent years (causing "generals" such as Michael Metz and Charles Clough to fall on their swords). Perhaps those still around to bet against the bull have finally decided to study the guerilla warfare tactics of Ho Chi Minh (himself a devotee of George Washington).
Sound fanciful?
Consider -- as Gurin did -- that assuming the short trades were placed Friday after the expiration, the bears "got a great short in even in the face of [today's] rally."
Meanwhile, I don't know anybody -- bull or bear -- who considers this kind of volatility healthy.
The Why, Part 2
Another potential catalyst for the market's snapback today was a rumor that Soros Fund Management had taken a long position in Nasdaq 100 futures paired with a short position in the Chicago Options Exchange Volatility Index. The trade would payoff at 3850 on the NDX futures -- which closed up 3.1% at 3791.50 Tuesday -- and 21 or lower on the VIX -- which closed down 7.5% at 24.34.
A Soros spokesman declined to comment (surprise!) while several market players said they were either unaware of the rumor or skeptical about its veracity.
If Soros were to become active in the relatively illiquid Nasdaq 100 futures, it would "make a big mess," said one dubious futures strategist. "Everybody would be on top of that news."
Still, 21,430 Nasdaq 100 contracts traded on the CME today, more than 27% above the average daily trading volume thus far in January, according to an exchange spokesman. |
