Monday, December 16, 2013

Here We Go Again- Denninger

Karl Denninger picks out some noteworthy machinations going on in the late hour trading (late hour US time) for S&P 500 futures. As Denninger writes at his blog.....

Anyone remember this crap from early 2008?

That's over 12,000 /ES futures contracts in the /ESH4 contract (March 2014); there were another 7,000 traded in /ESH3 (expiring Friday.)  That makes roughly 20,000 on that one-minute move (yes, it was all in one minute.)

It took price from roughly 1765 to 1754, or ~10 handles, instantly.  Which doesn't sound like all that much until you realize that for each contract that was $50/point, or $500/contract.  That is, about $10 million changed hands on an instant basis in the middle of the evening.

There's nothing on the wire to suggest a reason for this.

It'll probably be explained as a "fat finger" mistake, as these often are.  But the market is not recovering from this "fat-finger"; it is instead staying down, and looks like it wants to head back toward 1754.
Who knows whether it will.

What I do know is that in very late 2007 and early 2008 I saw a bunch of these moves in the middle of the night, and more than once I got gapped over and stopped out at a horrific loss that shouldn't have otherwise happened.  Such are the risks of remaining in a futures position overnight when liquidity is for crap and the hunters are out looking for you.

The point of this post is not to put forward the fact that a channel that had held through the last two trading days was just decisively blown up to the downside, or that if you had a long position on with a stop you probably got a bad fill and were nailed for a few hundred bucks per contract on the stop.

No, it's that this kind of move happens when systemic instability is running very high, not when all is well.
And while this doesn't necessarily mean that a crash is around the corner, it does mean that if you're not adequately protected, particularly if you're long some of the high-flyers out there that are trading on near-zero earnings (or worse, negative earnings) and sky-high pie-in-the-sky multiples you're taking a terrible risk.

Incidentally, in 2008 most of the time by the next morning all of those midnight dumps were recovered, which of course led many people to remove the safeties from their financial weapons of mass destruction (that is, their stops.)

That turned out to be an utterly disastrous mistake in the months that followed.

There seems to be some underlying moves themes percolating just under the surface that would seem to indicate that all is not well in the state of Denmark. But more on this later.....

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