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The other day I wrote about planning to get out of trades.
"Emergency stops are important, as are
the use of options if I have to trade my way out of an event day gap.
"Getting out" is rarely planned for."
With some gaps, there is no getting out of the way.
Here is an email from an off-floor S&P trader that describes how bad gaps
can get. The times are Pacific coast time.
"Today was the first time I can remember that a move actually frightened me
enough to consider the downside of Spoo trading. The only thing that saved
my bacon today is that the cubs station in the spoo pit went down at 11:50
so I exited the markets ahead about 19 handles. My next signal came at
12:14 which was a sell signal at 102400. Normally I would have sold 4 cars
and placed my stops at 102710 above the last swing high but without the cubs
working I decided to pass for the rest of the day. At 12:15 I heard the
noise level rise in the pit and the announcer yell "Fed Cuts Rates". The
market then moves up 50 handles on bids only so there were virtually no
fills until then and a stop would have been absolutely worthless except to
give me a fill at the high of the day. Then I heard him yell "Offers" at
the 107200 level and the market dropped 30 handles without hardly any fills.
If I was in it probably would have cost me 320 handles ($80,000) in 7
minutes and I would have had a very bad day.
After the close I called my broker and had my account level cut in half and
will just add it to CD's I have at a couple of my local banks until the
world gets back to a less volatile and hostile trading environment. I will
continue to trade the spoos but very lightly until stability returns. In the
past large moves never bothered me because there was always plenty of time
to get going in the right direction but this came out of the blue with even
most of the Piranhas pressing shorts when the news hit. Even they were
caught short and took a big loss. People trading the minis got filled way
up in the 108000 level and spreads between bid & ask went to 15 handles near
the top. It certainly wasn't pretty and the thought of getting caught for
that much on a single trade sent shivers up my spine (especially since there
is no upside limit to slow it down). "
A piece of analysis raises concerns about the timing of the Fed action.
"The S&P futures rocketed from 1024 to 1075, up 5 percent in about five
minutes, in what has
to be the biggest move in the history of the stock market. (Conveniently,
the futures limits are bigger in the last hour.)
There was a tremendous amount of buying and short covering as the averages
lit up. The Sox rallied 4 percent, the Nasdaq and Nasdaq 100 finished up 5
percent, and the bank stock index charged forward for more than 6 percent.
The timing of the move was most interesting. It was after all the futures
had closed. The only markets open were the equity and equity futures
markets.
Tomorrow is option expiration. Most of the narrow indexes (Nasdaq 100, Sox,
MSH, BKX etc.) expire based on the opening prices. If you were going to do
something to cause the most aggravation, it would be in the last 45 minutes
on a Thursday afternoon before expiration, while the rest of the world was
asleep. Either the Fed is stupid (and we can make a pretty good argument for
their lack of wisdom, as I have documented in past Raps) OR it intended to
MANIPULATE the stock market WITHOUT the discipline of the dollar getting
hammered or the gold market rallying. It is unclear what its motive was, but
naivete or stupidity is hard to believe. ...
To compound matters, there was a story in the Washington Post (the official
Fed leak source) that quoted an unidentified Fed official as saying that
unless something catastrophic happened between now and the next FOMC
meeting, they wouldn't change rates. Something major is brewing in the bad
news department."
Also ...
"It's not just the usual monetary-policy, looking-at-inflation-type thing,"
said Tracy Herrick, market strategist at Jefferies. "The cut was before a
regular meeting, which usually means there's an urgency. And they cut both
the discount and fed funds rate. When they cut both they're serious. They
are willing to take the risk to the dollar because something else is more
serious. I mean a Long Term Capital-type problem or a bank problem." The
dollar today fell 2.7 yen to 115.85."
Best wishes
Walter Lake
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