Waterfall Declines and Rocket Ship Rallies

I’m working on a post about the trading epochs of the last 30 years and how patterns and the behavior of markets has changed over time.  I wonder if we’re in a transitory phase right now.  Could the ETFized market and the uniform risk-on/risk-off mentality be the defining characteristic of the next phase of market behavior?  The last big shift was in 2006-2007, which I feel was attributable to HFT gaining popularity and the introduction of the hybrid market on the NYSE.  Trading patterns used to be consistent for decades, now they’re lucky to last a couple years.  The way technology is driving structural innovation, the patterns are likely to speed up in evolution.  I sure can’t see them slowing down.

I said that I didn’t really think we were out of the woods yet on the back of the recent run up.  It feels like we’re just in an enlarged version of the range we experienced in August-September.  A new and improved range bound market where the rallies are bigger and the declines faster.  While the market looks kinda hopeless I think the patterns I pointed out may still be in play.  Many of them bottom out on Tuesday and rally for the remainder of the week.  Of course after such a violent move down there’s less probability that we will make a new high for the week, but I don’t know many people looking to press short positions into the FOMC Meeting Announcement.  Breaching Tuesday’s lows will be a deadly sign.

I hope the clients accounts of MF Global are made whole and there’s no shortfall in customer funds.  The damage done in the MF Global bankruptcy is huge to both confidence and liquidity.  If a huge player like MF Global was co-mingling customer funds with its own trading accounts what are the chances that others are doing the same thing?  There’s never just one cockroach.   If the allegations against MF are true then there is no doubt in my mind that management needs to be prosecuted and sent to jail.  This is the height of arrogance.  MF Global was one of the biggest players in the S&P pit.  They’re now GONE.  Liquidity in the SP and ES contract will be a lot thinner until accounts find new homes — bank on the market staying volatile in the near term.

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