There was a recent fascinating article in the "Wall Street Journal" about the 'flash crash.' Oh, but wait. This is not from the 2010 debacle, but rather from 1962:
http://online.wsj.com/article/SB10001424052748703957604575272791511469272.html?KEYWORDS=flash+crash+1962
After reading this article a few times, several general themes came to mind. The first thing is a tenet that came right to mind. Markets will eventually go to wherever they should go. While in an Economics class in college, I participated in a game theory project used in research that eventually won the person conducting the experiment the Nobel Prize a few years later. Basically, it was a trading game whereby we all knew the value of the entity we were trading was going to go to 0. We had 20 time periods in which to trade it (only from the long side) with the person who did it the best winning a fairly significant real cash prize. So think about that- we had to trade a market we inherently knew was worthless with a real incentive of good cash for a college kid. So, the stock actually rose for the first few time periods before crashing down to 0 by the end. Now, we have no way of knowing whether things like the European debt crisis is going to mushroom. But we do know that in the end, every trading entity will rightly trade for fair value. It won't always be exact, but everything does have an inherent value. For instance, if a REIT has no debt, $11 in cash per share, and no assets because it sold off the real estate yet its trading for 7 in a bear market, it will go back to 11 eventually. Flash crash or not, assets go to where they should trade.
Second, errors and mini-panics have happened for ages (on both the up and down side). This will continue to happen particularly in the computer age of trading (more pieces to come on this in the next few days). Human nature is such that fear and greed can reach extreme levels- particularly when aided with machines more powerful than most of us can imagine in any scientific fiction journal we've perused.
Third, the cold thing but -so what? Should Accenture (ACN) have traded all the way down to 1 cent in early May? Of course not. There are going to be mistakes. But you know what? If nobody had a bid in there until 1 cent, well they are now filled 1 cent and the thing goes back to where it should go. Now, of course, that type of thinking will never stand in the real world for one reason. It'd lead to manipulation. Namely, entities would have an incentive to cause a real panic in something and have bids sharply beneath the market if they knew there was a shot of getting filled. It would dramatically increase volatility and make markets highly unreliable. In short, as day traders- all we can do is recognize those moments for what they are- weird nuances. Now, we don't know as they happen whether things like nuclear wars are happening. So, there's no real safe way to play it. Thus, a good gamble can of course pay off (i.e. the person who bought AAPL at 200 only to sell at 240 a couple hours later is happy). But know this much- things like that have happened before- and they will happen again. And it doesn't matter if it is humans, technology, or a combination of the two- in all times in all places, things like this have a history so just be well aware of the possibility of a 'flash crash' type scenario occurring again at some point in our careers.
Markets in Asia were mixed overnight with Tokyo down very slightly (less than 0.1%) but Hong Kong up 0.6%. The tone is decidedly good in Europe, however, with Paris up 1.3%, Germany 0.8%, and London 0.9%. Oil and gold are both up slightly with the dollar mixed- up slightly against the yen but down slightly against the euro. Bonds are notably lower with the 10-year down almost half a point and the yield over 3%. Futures are nicely higher on the heels of several strong earnings reports particularly Dupont (DD). There seems to be no real trigger for things to turn around other than ‘buy the rumor, sell the news’ although the newsflow is quite good. Off-hand, look for the gains to hold in a bit choppier session than yesterday but if things start easing lower in the first hour, there likely will be a slight reversal later. Focus on the myriad of earnings out such as X, FLR, the big cap techs, BP and the drillers on BP’s earnings report, and relative weakness plays particularly in the first half of the day.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
FLR- decent earnings
VECO- great earnings
ONXX- closed near a high after issuing positive phase IIb guidance on one of its main experimental drugs
GENZ- closed near a high on takeover speculation
MNTA- closed near a high
APA- closed near a high
FDX- closed near a high after upping its earnings guidance
CR- decent earnings
ASTC- closed near a high after winning a NASA contract
AMAG- closed near a high
OVTI- closed near a high
JLL- closed near a high
RMBS- US ITC ruled NVDA products infringed on RMBS patents
UCTT- good earnings
NFLX- on “Mad Money” last night
BP- decent earnings
DD- great earnings
LXK- good earnings
NDAQ- decent earnings
TEVA- decent earnings
UA- decent earnings
ENR- decent earnings
CMI- good earnings
TLAB- decent earnings
VLO- decent earnings
CPO- good earnings
PCAR- decent earnings
RF- decent earnings
ABC- decent earnings
UA- decent earnings
AKS- good earnings
Bad-The following stocks have bad news and/or a weak technical pattern
LM- poor earnings
PCL- poor earnings
PLT- bad earnings
VLTR- bad earnings
ZRAN- bad earnings
FIBK- closed near a low after a downgrade
SAP- poor earnings
LLL- poor earnings
OXY- poor earnings
X- poor earnings
Earnings:
TUES JUL 27 BEFORE
ABC AKS AMG
BEAV BP CIT
CMI DD DPZ
ECL ENR LLL
LMT LXK NDAQ
ODP OXY PCX
RF ROC SAP
SVU TEVA TIN
TLAB TMO UA
VLO WTNY WU
X
TUES JUL 27 AFTER
ACE AET AFL
BRCM BXP CBI
CENX CEPH CHRW
DWA FISV GPN
IGT ILMN LVS
MEE MTW NBR
NLC NSC NUVA
PNRA PPDI STR
TRMB WBSN
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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