Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Stock Market Flash Crash, Fat Fingers, and Positioning for a Correction

Stock-Markets / Stock Markets 2012 Mar 07, 2012 - 10:36 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleShah Gilani writes: Speculation is running rampant about what really happened to the markets last week.

In case you missed it, as Fed Chairman Ben Bernanke was chatting up Congressional clowns last Wednesday morning, Treasury bond prices collapsed in one minute flat, and gold dropped 3.73% in less than an hour, ending $90 an ounce (or 6%) lower.


Was it a "ghost in the machine" flash crash?

Was it a "fat finger" error?

What happened?

Starting at 10:40 a.m. on Wednesday morning, sell orders began cascading into the 10-year Treasury bond pit at the Chicago Merc. The heaviest selling occurred between 10:43 and 10:44, but continued until 10:54.

A massive 80,000 contracts for June delivery were dumped in the pit, followed by another 47,000 contracts. While another 52,000 contracts of five-year note futures were simultaneously dumped.

The price action was so heavy, the 10-year yield rose from 1.94% to 2.01% in a flash.

Over at the gold pit, some 31 tons of gold was sold, rather quickly.

Turns out, it wasn't a fat finger. You know, a fat finger - when someone accidentally types a mistake into a trading computer. Like, maybe they were supposed to type in a sell order for 8,000 contracts, and they hit the zero key one time too many, and they sell 80,000 contracts.

Well, according the Merc, it wasn't a fat finger error. They were all proper trades.

So if it wasn't a fat finger, was it a flash crash caused by some computer programs doing their algo thing and unloading both barrels?

No, that's not likely, either.

The truth is, we still don't know exactly why it happened.

But I'm going to tell you what I think it was...

The Maiden Lane Warning

The usually dour bearded Ben wasn't his usual doom-and-gloom self. In fact, that morning he was pooh-poohing the idea that a new round of quantitative easing - or QE3, or 4, or 5, or whatever it really is - was on the Fed's front burner at this juncture of better-than-expected economic numbers coming from left and right.

Of course, we're not out of the woods, especially on the housing front. But the immediate reaction to taking QE3 off the table likely resulted in the dumping of bonds.

Because the Fed has been excessively accommodative, especially buying mortgage paper to support that market, hedge funds and huge institutions have been bullish on bonds and especially mortgage paper.

The Fed recently sold the last of its Maiden Lane inventory. (That's the name of a street in lower Manhattan where the Fed has some office space and was housing billions of dollars of mortgage bonds that it kindly took off the hands of AIG (NYSE: AIG) and some other miscreants who couldn't stay above water.)

Who bought the poisoned paper? Big banks, of course. Mostly, they said, for customers. That means hedge funds and institutions betting that the Fed was eventually going to fix the mortgage markets, and prices would rise nicely.

But hedge funds who have been loading up on mortgage paper use a lot of leverage. Some as much as 30 times their capital, and some even more.

What does that have to do with the price of rice in China, you ask?

Try this on for size.

Once Big Ben put QE3 out of immediate reach, the implication is that mortgage paper may not get the backstop it has been given by the Fed.

Maybe once they dumped their own Maiden Lane inventory, they decided, let the buyers beware.

Back to the price of rice. Make that gold.

If the Fed isn't going to keep flooding banks with cash, and keep their printing presses running 24/7, then maybe we won't have the great inflation that some speculators are betting on.

Maybe there's no need to hedge that scary future by holding gold.

That's one thing that could have triggered the gold sell-off immediately after the T-bond sell-off.

But there's another reason the gold sell-off could have occurred. If leveraged hedge funds don't see the mortgage market that they've bet heavily on running higher, maybe they began dumping gold to raise cash to offset falling mortgage prices.

And guess what? As T-bond prices were collapsing, so were mortgage bonds.

Mortgage bonds are a lot less liquid than gold, which a lot of funds have been holding and profiting from.

Why Caution is Prudent (for Now)

We'll see this week if there's more selling of liquid assets, as some of these funds are going to get margin calls - as are a lot of gold buyers who piled onto the gold trade late in its recent rise and just before last week's fall from grace.

If we're nearing the top of the recent rallies everywhere, which is possible, partly now because Ben has taken QE3 off the table, for now, I want to be more cautious.

We're still trying to make a run at important benchmark levels, and I think we've got a better than 50/50 chance of breaking through on all of them. But I am beginning to worry.

If gold breaks its support at 1689 and then breaks through 1540 (its major support) on margin selling pressure, I'm going to get very, very, bearish.

Also last week, the Russell 2000 broke down. That's not good news at all. It means that the headline indexes are all puffed up because of media hype and one very shiny Apple Inc. (Nasdaq: AAPL). But underneath, the broader market of less-hyped stocks is rolling over.

It's time to buy the VIX. Don't hesitate; it's near its February 3, 2012, lows, and so what if it goes lower? We're getting close to where we were last year before the markets rolled over. So, in case they do, I want to start putting on some protection.

I also said oil was worth the risk, and I still think it is worth buying. On that one, I'll be watching the $101.56 WTI price level as support, and if oil breaks $99, I'm out with a small, less than 10% loss.

We've had a good run, and I hope it continues. But when I see things here and there breaking down or cracking, I start to think about a correction and how to position myself.

You should too.

Editor's Note: If you're fed up with the rampant corruption, double-dealing, and protection of Wall Street by Washington (at the expense of the taxpayers on America's Main Street), then you need to read Shah Gilani's Wall Street Insights & Indictments newsletter.

As a retired hedge-fund manager, Gilani is a former Wall Street insider who knows where all the bodies are buried. But unlike most insiders, he's not afraid to tell you where they are.

He's also got some pretty good ideas how to fix this mess - and how to protect yourself until the cleanup takes place. Please click here to find out more about Shah's free newsletter.

Source http://moneymorning.com/2012/03/07/the-real-china-story-its-what-premier-wen-didnt-say-that-matters//

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules