Fat Finger Fireworks
The Jobs data was not that bad! At least not bad enough to prompt a drop in the Dow futures to 8478 at 10:40 AM on Thursday. It was a fat finger order error that shocked the markets and killed any hope of a patriotic rally to end the week. Although the error occurred at 10:38 the market never recovered from the blow and traded very tentatively the rest of the day.
Dow Chart - Daily
Nasdaq Chart - Daily
The leading economic disaster for the day was the Jobs Report, which painted a much bleaker picture than the last report for May. In May numbers were revised up for the past couple months and led investors to believe the economy was improving. In June the country lost -30,000 jobs which was below the consensus estimates of zero. As if this was not bad enough the numbers for May were revised downward to -70,000 from -17,000 and April numbers were revised down to -22,000 from zero. Essentially we went from a -17,000 job loss over the last 90 days to -129,000. This was a significant change in the employment picture and emphasized the point that the governments numbers are not to be trusted. What would June's numbers be revised to in July? The unemployment number soared to 6.4% and the highest level in nine years. This was also the fifth consecutive month of job losses. The shock to the markets was substantial.
The current jobs data continued to decline with the current Jobless Claims rising to 430,000, an increase of +21,000 from the prior weeks numbers. This reversal of the four week down trend also sent shivers through traders and worries that the economic recovery was slowing or even declining. This was the 20th week over 400,000.
Helping offset the negative employment numbers was a huge increase in the ISM Services number to 60.6 from last months 54.5% This was the best month since Sept-2000 and the markets quickly pulled out of their nose dive and rallied back to break Wednesday's high on the Dow by one point. The new orders and employment components rose substantially. This was seen as a leading indicator for the general economy as services tend to improve before manufacturing. The substantial amount of the increase surprised traders and replaced some bullish sentiment lost by the jobs data.
All this conflicting economic data and up and down moves in the market were making traders motion sick by 10:30AM but the worst was yet to come. About 10:40 the CBOT received an order to sell 10,000 contracts of Dow Emini futures contracts. With the average daily volume of 48,000 in June this was a huge order that sent the Dow futures plunging to a low of 8474. This triggered buy and sell stops across all the futures products including the S&P, NDX, ES and NQ contracts. The cash markets dropped from Dow 9105 to 9035 in just a few seconds as traders pulled the plug on buys and stop losses were triggered across the board. The problem was a fat finger order which according to the CBOT was supposed to be for a sell of 100 Dow contracts instead of 10,000. Amazing what a couple extra zeros can do to the market.
The rebound from the depths was almost instantaneous but the after effects were still lingering at the close. When errors like this are entered they are quickly cancelled and the exchanges try to right the wrongs by busting the real orders that were triggered by the error. Busting the trades is not always instant and not always fun. First the exchange has to research the problem and then decide what to do. In the case of the Dow futures do they bust the trades or not? Where do they bust them from? At what point do they decide a triggered trade was too far away from the market to be material or close enough to the market to be considered fair game? Do they bust trades in just the Dow futures or in the S&P and NDX as well? Considering the very interdependent markets an error in the Dow futures creates instant errors in the others as well. Where do you draw the line? The markets wandered all morning while they waited on the decision.
Traders were unsure if the gains or losses in their accounts would be reversed or not. If you were short when the error occurred and sold at the bottom you could have made thousands on the move. If you reversed your position and went long on the dip you could be holding longs worth thousands. Even if you sold the longs the outcome was still in doubt. If they busted the trades you could be put back into your short at 9100 as though nothing happened. All the gains, losses and positions simply cancelled. If you are a trader what do you do? You can't spend the money on new trades. That money could disappear in an instant and put you into a serious margin bind. Traders were handcuffed to the clock and were forced to wait for the decision.
The CBOT finally announced just before 1:PM that all YM03U trades (September Dow Futures) below 9017 were in error and would be busted. The December YM contract would be busted on any trade at 8985 and below. They limited the bust to trades between 10:38 and 10:40:04. S&P and NDX trades were left on the books. With only minutes to go before the close the indexes dived on the news as traders raced to square positions in reaction to what was about to happen to their morning trades. Confusion was rampant. My inbox is full of Futures Monitor reader emails with horror stories and relief messages from the implosion. Readers who were long with stops in place were filled handfuls of points below their stops. Traders without stops could not enter orders because their broker platform crash under the weight of the order flow. Anyone long or short any futures contract was immediately impacted and had to wait until the close to see where they stood. I have readers with $10,000 paper gains cussing the bust of their trades and readers with thousands in losses gushing relief that the trades were busted.
The broader market wandered about dazed between 11:00 and 1:PM while the cobwebs from the sucker punch cleared. Adding to the confusion was what seemed like a constant stream of news relating to potential terrorist events. A car with a potential bomb was rumored to be found at LaGuardia and the entrances to the airport shutdown. Explosions later attributed to natural gas leaks were reported as potential terrorist events. Warnings about a potential Internet shutdown by hackers over the weekend were also making the rounds. The early close at 1:pm was a blessing in disguise.
Despite all the confusion above AND the negative employment numbers the Dow still managed to close near 9100. The Nasdaq dropped -15 but still closed well above 1650 at 1664 after bouncing off strong resistance at 1685 for the third time in a month. We are well above the 8871 Dow low set on Tuesday and the best five days of July are still ahead of us. If today was next Friday my outlook would be entirely different.
Not only did the market shake off the economic news to set a new high for the week but it did so on a flurry of high profile earnings warnings. The end of week rush to confess included BSX, PMTC, MCRL, BAX, ADPT, SEBL, WEBM, TWTR, DCTM, SOI and ECIL among others. DAL warned that passenger traffic fell -5.5% in June. Traders did not seem to care that the warnings are increasing. They are looking forward to the beginning of major earnings next week. This is what it all boils down to and with the economic pot barely simmering it could be a cold meal ahead.
The gains for the week were fueled by the retirement cash flowing into funds and by the movement of funds out of money markets. ICI reported that money market funds saw outflows of -$8.56 billion for the week ended July-2nd. Also, despite the worst jobs numbers in nine years bonds continued to sell off and that money is finding its way into the equity markets. Yields closed at levels not seen since May-9th. What is a bond junkie to do? The bonds are dropping from 45-year highs despite a Fed commitment to keep interest rates low. The problem is appears is the stock market. With 37 million retirees hitting the rolls in the next five years all basing their retirement income on 10% annual returns a 3.5% bond is losing ground. They are seeing the stock market back over 9000 and thinking the worst is over and double digit returns in stocks are here to stay. I am not going to get into that argument this week but this is what is powering the markets. It is purely sentiment based on feeling not on facts.
That brings us back to next week. Despite the morning bombshell on Thursday and the flood of earnings warnings the markets only pulled back to support. Despite the worst jobs news in nine years they set a new weekly high. The sentiment and cash flow is rampant. That means the historical July trend appears to be intact and we still have a week of upside left. That assumes of course the retirement cash that piles up in mail boxes over the weekend is put to work and the mutual funds don't front run the historical July decline before next Friday. I would bet on the funds hitting the market and I would bet on the front running. The only question for me is when will the selling start?
The SPX hit 995 on Thursday and well above the 962 dip low on Tuesday. Without the order implosion on Thursday I was projecting 1010-1015 as the high for next week. I am not as convinced today that we will see those numbers. It all depends on the spin. There are no major economic reports early next week and that could be good or bad. The last time we had no economic news the market tanked. Next week I would hope for a different result. With the bullish sentiment running high and cash flowing from bonds and retirement funds we should see several more days of gains. The earnings accelerate from five on Monday to 32 on Thursday and include such notables as AA, first Dow component to report on Tuesday, to YHOO on Wed and GE on Friday. The following week we get the big three, INTC on Tue, IBM Wed, MSFT Thr. It would stretch my belief system to think the market will hang around over 9000 until Microsoft announces on Thursday the 17th. That means I am expecting a top somewhere between 7/10 and 7/17.
It is not that I think the fundamentals have changed. It does not mean I think the market will crash. It only means the normal second half of July dip should start in the next 5-7 trading days. I know this is going out on a limb by suggesting a turning point in the market, especially when the market is so bullish. However that is what the charts tell us if you take the time to research the last few years. You can see my past analysis here: http://members.OptionInvestor.com/MarketWrap/mw_062403_1.ASP
As traders you do not have to believe me. I do not have to believe what I see. We only have to trade with an eye on the possibility of it coming true. Currently in the Editors Play section we are accumulating an August put position on the DJX. We are hedging that position with calls we bought on the dip below 8950. If everything continues to play out as expected we will be selling those calls next week as we near the potential sell on the news earnings events. If you are long the market I strongly suggest you prepare for that chance as well.
The bullish news is strong. There is every indication the market is poised to go up. Cash is flowing and the term "new bull market" is becoming more popular than "new economy" was a couple years ago. That alone should cause some conservative thought. At the risk of sounding too clichéd I was waiting for somebody at the airport last week and two people who did not know me, a shoe shine boy and an airport worker, both brought up the stock market rally in normal conversation. That made the hairs on my neck stand up. While I do not believe their interest is relative it does show that the market is coming back around again into investor consciousness. Perennial bears would say this was just in time for the retail investor to get clipped again. I would rather not make any market calls and just trade what the market gives us but that is even more clichéd than the pervious statement. I do not believe you can trade without having a bias and that bias had better include an exit plan in case you are wrong. Do you have a plan for the eventual end of this rally?
Enter Very Passively, Exit Very Aggressively!