May 7. Down plunges 1000 on ‘fat finger?!”

An extraordinary day Thursday.  By now everyone is aware of the possibility of a “fat finger” error, and contagion due to Greece.  However, these are the “broad strokes” as I see them.  First, when a market hits a vacuum where there are no bids (like stocks yesterday), it’s typically because of an imbalance where there are no more shorts, as they’ve thrown in the towel.  Otherwise there are resting bids all the way down that break the fall.  There could be technical reasons for the extreme move, but this was clearly a complacent stock market that had shaken out all the shorts.  That’s why the move was violent, and why it’s not likely over. The huge increase in VIX and in interest rate options argues for this thesis.  These were HUGE curve moves and vol moves associated with fear of a major funding crunch.  Implied vol in near euro$ contracts EXPLODED. Second, there were many stock market cheerleaders on tv after the session, saying that this sell off provides a great opportunity to buy companies in our growing economy at “sale” prices.  In my opinion, these people underestimate the linkage between asset price increases and the real economy.  Part of the reason for the economic rebound is due to the levitation in asset (stock) prices, made possible by the government’s liquidity spigot.  This dynamic tends to increase confidence and spurs consumption.  Falling asset prices put the machinery into reverse.  Take a cue from the treasury market; ten year yield fell 16 bps to 3.38% in spite of auctions looming next week.  It’s not a sign of underlying strength.

Posted on May 7, 2010 at 3:55 am by alexmanzara · Permalink
In: Eurodollar Options

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