Monday: The World Awaits
Monday's tentative open for U.S. equity markets will certainly be a global event. Since Tuesday morning all foreign markets have been trading in a vacuum, doing their best to anticipate what will happen between the next opening and closing bells.
Let me first go on record stating that my preference now, before Tuesday and forever aft would be to see a rising bull market with one or two weekly pauses that let us enter calls and walk away. That is the type of trading I fantasize about... and you?
But we can be utterly sure that the markets we get will be exactly what is dictated to us and nothing more. Blind hope, stubborn bias and patriotic emotion will not yield a plugged nickel's profit but could easily result in vast fortunes lost. Such being the truth, let's do our best to analyze and anticipate possible market scenarios devoid of such innate human weaknesses.
Friday's foreign action saw the Toronto and European exchanges shedding considerable value to close much lower. Asian markets ended the week in green fashion but well below weekly highs after plunging sharply in their Wednesday session. Gold prices have spiked to lofty levels in daily moves unseen for quite some time. Oil prices are also thought to be on the rise in the near to medium term as well.
Market bulls have repeatedly implored investors not to panic and "hold the course". We talked about herd mentality in last night's Wrap and know for a fact that basic human nature cannot be thwarted by mere words alone. If U.S. markets begin to sink before or at the next open, selling could intensify.
I'm of the opinion that our Fed will cut interest rates only if they absolutely must. That could be shoring up a market in full decline with no bottom in sight. Greenspan and co. realize recent events could point the U.S. and global participants into a consumer recession of unknown depth or duration. Interest rate cuts are one of the few tools left to combat this but the rate- cut gun is running dangerously low on ammunition. Time to wait impatiently for vital shots from here because precious few of those bullets are left.
Contrary to Larry Kudlow and other "Raging Bull" irrational type's desire, our Fed cannot slash interest rates to zero without upsetting the economy as well. Japan has already proven that doesn't work with disastrous results from trying.
Many individuals and funds are pledging to buy struggling companies in support while avoiding shorts that profit as a result of terrorist acts. I respect that decision as a basic right for anyone to enact, but there is another side to that equation as well. Patriotic players who eschew profiting from any terrorist market influence must likewise short gold, oil and defense company stocks. After all, none of these sectors would be going up if it weren't for Tuesday's dastardly deeds. Emotional traders can show those terrorists that gold, oil and defense-sector companies will not profit from such unspeakable acts by shorting these stocks or commodity contracts with patriotic impunity!
"Hold on there, Passamonte... what are you saying?" I'm saying that the ideology of propping up stocks that will fall because of negative events is directly akin to suppressing those that will rise because of it. There is absolutely no difference between the two, now is there?
For those who retort that rising markets are good no matter what the catalyst have now shifted sentiment from movement based on tragic events to generic bias on market direction, now haven't they? Gold stocks rising because people died and more are in jeopardy until proven otherwise are no less profiting from tragic events than shorting airline stocks would be.
So I expect extreme volatility on Monday. The Dow could drop - 400 to -800 points minutes from the open. It could bounce back and actually turn screens green if buyers step in, especially with an inter-meeting rate cut by the Fed. Don't be surprised to see an opening plunge, substantial bounce soon after and subsequent selloff again. Keep in mind that volume is likely to be huge and many foreign players in equities and futures arena will gleefully trade fundamentals if U.S. patriots play emotions. Too much money is at stake otherwise, and plenty of players will readily accept us "throwing the game" if we choose to buy or refuse to sell the wrong stocks next week. The choice of course is each of ours, and plenty are waiting to take the other side of any decisions we make.
All options listed on the CBOE and AMEX will expire next week at appointed times. There will be no extensions of expiration per CNBC's Rick Santelli clear explanation today. Options are binding contracts with deliberate and finite time parameters that do not change and cannot be changed.
This means that long calls and puts have suffered the past week. Both slipped greatly in time value. A significant market move down may only offer a chance to exit long puts near entry cost, while a solid move up may only offer par for open calls as well. October and other distant-month contracts will have lost little premium value compared to September but front-month contracts are the greatest percentage of open interest out there.
So we can expect plenty of trigger-happy option traders looking to get out on either side with small gains or capital intact. There are also plenty of futures traders stuck holding long or short index futures contracts at levels they aren't comfortable with either. Keep in mind this is a Triple-Witch expiration week as it is. Many traders had planned to unwind equity and index options along with index futures positions. This will be magnified many times over when last week's volume is dumped on the market as well.
Market pundits who tout their belief that indexes may trade in a calm & orderly fashion must not envision a triple-witch event times two. They must not know what it's like to hold long calls, puts or futures contracts that are all wasting assets due to expire in mere days. They must not realize what it's like for investors and traders to watch Asian and European markets close the week sharply lower while locked out of the game themselves. They must not realize how pent-up emotions tend to uncoil when opening bells ring.
Make no mistake, this will be a wild, tumultuous week ahead. No one can aptly predict what shall actually unfold the first day, the next four and weeks after that. All I can say is, we already had incredibly wild volatility and fundamentally weak markets before. It appeared the indexes were poised for a significant technical bear-market rally. None of the prior or subsequent events this week have done anything to smooth future market action.
Best Trading Wishes,