Dec

13

There is much talk about how to interpret the bearish Open Market Committee announcement followed by the bullish joint injection of reserves which led to the greatest absolute value of moves ever from 2:30 to close and close to open, 85 S&P points in total.

Many will try to interpret the content, the whys and wherefores of what was done, and the timing thereof, but I am tempted to cut to the chase and say that it is the like the final blast of the fireworks, or the finale of a classical symphony, or the final minutes of a sporting event such as a bike race or basketball game or 100 yard dash, where everything hangs on the last ultimate effort.

Rather than searching for more analogies, I will go out on a limb and say it appears to be the final disruptive move, the boiling water that the frog is thrown into to get him to jump, the greatest observable difference of Fechnerian Psychology. Merely the final attempt to loosen the weak from their positions.

There's the rub. Which side is trying to loosen which? I don't know. There have been seven days in the last 12 years where, like the last two days, there has been a high to low range of more than 45 points. The range Dec 11 was 56 points, and Dec 12 was 46. The last time it happened was Jan 3, 2001, where a 46 point range was preceded by an 81. Of the seven occasions, three were followed the next day by a rise, and four by a decline.

In closing I must tip my hat to the highest up open in futures in history (on a non-holiday), 34 points yesterday, surpassed only by the 36.5 on June 2, 2000 which followed a Memorial Day holiday, and surpassing the 32 point up open on the day after the Fed first lowered the discount rate this year (August 17, 2007).

Anatoly Veltman writes:

Bernanke & Co. managed to screw up a perfectly good market — and market participants will not forgive them! Tuesday: Fed fell prey to a technical set-up in bonds, that even many an experienced chartist didn't anticipate. Wednesday: they made an elementary timing error, much easier to avoid. I can't remember the Greenspan Fed erring on intra-day timing, except maybe in the first half-year of his tenure — when he could hardly fill Paul Volker's shoes in May 1987. All Bernanke needed to do: wait with the intervention announcement until well into the trading session — not release the golden goose a half-hour before the open! The result: we just completed two high-volume stock market sessions, both opening high and dropping all day! To add to the bearish sound of it: it's also happening during futures rollover — which enabled Wednesday's close well off the low, and right below the middle of two-day range. So, what do we have piled in electronic trading books for the remainder of the week? Offers on every stock right above the market — from participants let down by the Fed, and just praying for an up-tick — so they can get out, and call it a year. Well, those who pray instead of reason usually get carried out. The market will tire of knocking into their offers — and turn down. Will there be bids right below? Bid on new front month S&P 10.00 dearer than the one in front yesterday? There could be slight mental block about that — or am I the only guy in America loving stock specials?

Kim Zussman comments:

I am not knowledgeable enough to draw a constructive analogy between markets and nature.

A (popular type of) supernova is when a star runs short on hydrogen for fusion, cools and collapses, and in a huge explosion higher order fusion occurs, creating the heavy elements essential for the formation of life (as we understand it). Typing is complicated, as is the astrophysics, but in all cases it is a catastrophic explosion which would sterilize a large local sphere. Long ago I read that if the bright star Sirius, eight light-years away, were to supernova the radiation would end life here. (Our sun is too small for this, and supposedly in four billion years will run out of hydrogen and swell up as a red giant, engulfing earth. I am not too confident there will be sapient beings around then to worry about it).

Presumably the analogy is about how destructive supernovae are seeds of new life. In markets there seem to be periodic events which destroy longs, and shorts, and then maybe new life starts. The problem is they occur with day-week-month-year timescale, and only maybe you and three other people can see these in real time — the rest of us in retrospect.

Just isolating on human affairs, I can't imagine a real-estate decline compares with war, famine, epidemics, etc.


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  1. Barry Gitarts on December 13, 2007 9:56 pm

    The best trades during the day of the FOMC has been selling into strength. For those brave enough to hold overnight it has been buying weakness. How few could have taken advantage of that huge gap up, since so few have the guts to hold a leveraged position overnight after a day like 12/11/2007.

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