Thursday, May 6, 2010

06/05: A Black Swan session

Today's market action has been so uncommonly dramatic as to spur a renewed effort at entries to Ad Astra Hoya. Going forward, I pledge:

1) daily entries,
2) a focus on readable content over artistic flourish, and
3) execution upon twin mandates of true value-added within a delivery vehicle of brevity.


Owing to the day's gravity, today's entry will delve into a domain of higher word counts than shall be my target. But first some pictures.

SPX (S&P500 index), one-day

PG (Proctor & Gamble), 1p CST to 3p CST

CVX (Chevron), one-day

$DJI (Dow Jones Industrial Average), YTD; that bottoming tail to sub-10k is real price action, not an errant tick

/ES (E-mini S&P500 futures), 2-year, weekly bars; note how this week's (i.e. mostly today's) volatility compares with the 2008-09 financial crisis

CF (CF Industries Holdings Inc), ~1-month, hourly bars; note how, during this afternoon's utter collapse, volume did not reach new highs -- this indicates that market makers reduced bid size en masse, allowing price to crater without a necessary spike of volume to period highs.


Today's Black Swan -order price action occurred without an obvious impetus. Markets are, of course, embroiled in the Greek debt imbroglio, and today, like the previous few, brought fresh clashes on the streets of Athens between protesters and police. Today also witnessed parliamentary elections in the UK and, as expected, Tories are expected to win a plurality but not a majority, resulting in a rare (for the Westminster, first-past-the-post political system) hung parliament. Yet none of these explain the ten-percent massacre that the markets at their nadir suffered. Even a two percent decline is difficult to explain given the dearth of any specific data today.

To the contrary, markets dipped around 10:45a CST into significant support at 1150 on the /ES, a level that featured the combination of strong support/resistance on the 1-year chart, a round psychological level, and most importantly, a key Fibonacci support of 38.2% retracement between the YTD high (1216.75 on 4/26) and the YTD low (1040.75 on 2/5). I was, in fact, so confident of this support level that I entered a directional options position in near-the-money, May SPY calls right as /ES momentarily spiked into this support from above. The decision was vindicated with a nearly 10-point pop in the /ES over the ensuing one hour of low-key lunchtime trade; but then, most unexpectedly, momentum abruptly reversed and this seemingly iron-clad support of 1150 broke like a pinata on Cinco de Mayo.

By 12:15p CST, /ES was submerged beneath 1150 and, within the next 90 minutes, it would be momentarily below 1060.

The markets at that moment were absolutely surreal. Spread on front-month, near-the-money /ES options, normally a penny or two, ballooned to a quarter or more. Disbelief exceeded all possible expectations as the capitulation reached an excess that I'd never believed possible in the absence of real news. CNBC was feverishly reporting each additional hundred point chop of the Dow and unable to provide a definite explanation as to why. The whole experience was utterly extraordinary, ghoulishly horrifying, as traumatizing as if I'd witnessed a moderate accident. Divorcing the whole two hours from any impact on P&L, the fear emanated from the shattered conviction that markets ARE NOT to act this way, that in the absence of obviously damning news, market maker bidders would not desert the marketplace and allow it to shed a twelfth of its lustre in the time it takes a nervous, palpitating heart to cycle its lifeblood around the vulnerable, mortal organism that is man.

In light of this from-far-left-field volatility, a tightened, more precisely defined risk tolerance is a necessity. I shall be working on such an articulation tomorrow, during a fresh morning, on the day of the momentous monthly unemployment report. Oh joy, what could tomorrow possibly bring? :)


For the record, market indices recorded the following action by the merciful 3p CST closing bell:

SPX: 1,128; down 3.2%
DJIA: 10,520; down 3.2%
COMP: 2,320; down 3.4%

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