Daily Market Update – August 25, 2015 (8:15 AM)
It’s probably senseless to try and describe yesterday’s action.
Whatever it was that caused the 1000 point decline in the first 10 minutes, somehow it didn’t really frighten away some brave people.
No one was more surprised than me to be among those adding new positions yesterday morning, but in hindsight it may have seemed premature to have done so as the market ended up the day having done just as badly as it ended the previous week.
The conventional wisdom is that these kind of plunges are necessary in order to flush sellers out of the system and then you often see a significant bounce higher.
The late Mark Haines of CNBC used to be very calm in the face of these kind of early morning sell-offs that followed a similarly large sell off the previous day because his experience was that was the first step of the climb higher.
That seemed to be the case yesterday, but what was missing yesterday was any sense of frenzied selling, despite the fact that there was a 1000 point decline in those first 10 minutes.
Given how quickly the recovery set in, there had to be the realization that the decline was not something truly based on market forces, but rather the result of sell orders hitting mutual funds on Friday and perhaps some hedge funds calling it quits, in addition to forced margin selling.
Later, another reversal of the initial reversal, something that we may need to get used to, was fairly orderly.
So if you were waiting for a real blow off kind of moment, also called “capitulation,” it hasn’t really shown up yet. What we have been seeing, and this morning’s futures are consistent with that, is the typical kind of out-sized moves in alternating directions that you see in a bear market.
Those moves actually started more than 2 months ago. In fact, people who study this sort of thing will tell you that you don’t even need the alternating component. Simply seeing out-sized moves higher is emblematic of being in a bear market.
This morning comes as China’s Shanghai exchange was down another 7%.
I went to bed last night seeing the Shanghai futures trading much lower, but the US futures were picking up strength, which came as a surprise.
The extent of that divergence when waking up tghis morning was a real surprise, that was widened when the People’s Bank of China announced an easing on its lending and bank reserve requirements.
So far the attempts to control China’s markets, currency and economy haven’t fared terribly well, but these things are like trying to stop a steaming locomotive. If you remember your basic physics, there’s that concept of “momentum” at play. It takes lots and lots of energy to put the brakes on something with momentum.
That’s exactly what economies have. Lots of momentum and typically very slow to respond to external forces.
With a couple of new positions opened yesterday and the market moving higher, I would love any opportunity to sell more calls, but with the move higher comes a drop in volatility. Yesterday, in looking for call sales opportunities the prevailing picture was that of a dumb struck options market. The moves were so sudden and pronounced that there were very, very few bids, so sellers were there to sell, but no one was there to buy. Not even offering a ceremonial bid that could offer some room for negotiation.
We’ll see how or if that changes today.