short term market update for sept 14

update of the current market.

An alt is, we might just start the v wave and will make new high in days.

Stock Traders Find Speed Pays, in Milliseconds

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By CHARLES DUHIGG

Published: July 23, 2009

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

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The Thirty-Millisecond Advantage

Today's Business: Charles Duhigg on Trading Strategies

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”

comparison the current rally with one happened on the tech buble.

Just want to share some of my thoughts with u. Read ur site everyday. thanks for your good work.

Part one

Where the market goes in the future will mostly depends on where the dollar goes and where the dollar goes will be determined by the policies made in DC. So the Capital Hill and the White house will dictate over any chart reading on the path of the market direction. I don't know how high or how low $spx will go in the next few months or next few years but I am pretty much sure about one thing that is if the current policies (both fiscal and monetary) are not the right cure the prices of all kind of assets will respond accordingly and the market forces eventually will push politicians and American people to make the right decisions no matter they like it or not.

The fundamental root cause of the current problem as we all agree is overspending in governmental. corporational and personal levels. The correct cure is to control spending within its means. The Consumer is doing it (by foreclosure, default on credit card debt and spending less while saving more) and corporations are doing it accordingly (by layoffs and cutting capital investment) but the government is doing the opposite due to political considerations. The market will respond to the government policies in different stages which could be treated as a scoreboard for the outcome between the forces of government and the forces of the market:

Stage 1. from Oct. 2008 to March 6 2009: The market forces won. Market's primary concern was deflation: therefore we saw equity , commodity drop sharply while bond and dollar rallied even though Fed injected tremendous amount of liquidity into the system and Government is bailing out everybody.

Stage 2: from march 6 to a near future (most likely to Sept. 2009): The Government wins. Market's primary concern is government spending when the financial system is seemingly stabilized ( which is not and we will see the financial system collapses again in stage three) therefore dollar weakened, bond yield jumped, equity rallied. Although the government policies win so far the market is giving warning signals to the government by testing the limit of how weak the dollar can go and how much weak dollar induced inflation the US economy can withstand. The yield of 10 year treasury note and crude oil will keep climb (my guess is 10 year yield around 5 to 5.5% and 30 year mortgage around 7.25 to 7.75%. as for oil little bit hard to project but it could go to 105 to 110 level) until the economy turns into a nose dive mood again. I don't know the exact time frame but I suspect b4 Labor Day we will see oil peaked by then and all the economic indicators pointing to deteriozation in a fast pace.

Stage 3: market forces win again. $SPX down another 50% or so from its peak in stage 2 (probably around 1050 as its peak). Commodities tank again. Dollar and bond rally again. Unemployment rise above 12% and heading to 15%. The second wave of foreclosures(mostly prime loans) and credit card defaults and commercial real estate defaults will hit the banks harder once again. Now what the government will do will once again determines the outcome of next stage.

If by this time the government could adopt the correct policies and let those should fail fail then the healing process will start from here and we will see a start of a bull market pretty soon or at least the market low reached in this stage will be the LOW.

If the government instead does not learn the lessons and increase the magnitude of the wrong polices implemented in the stage 2 (more spending and more bailout), we will see a repeat of stage 2 with hyperinflation this time. The dollar could lose its reserve status and there will be large scale social and political unrests until American people really wake up and decide to take bitter medicines that they should take at the first place. I was so mad at the politicians at DC and their stupid policies that I was too biased to think the American Century is gone and this country will end up falling apart. However I strongly believe we human beings are able to learn from our own mistakes and are adaptive to the new challenges. The American people may not be able to convince themselves now that less government spending and live a simpler life is the best solution but they will realize they have to to do so when they see otherwise their country will be falling apart and they will have no life instead of a simpler life. The market dynamics will force American people to adopt the correct policies in the end and will rebuild the great American experience. It's just too sad to foresee the Americans could go through this tough period with less cost and pain instead the luck of the will of both its citizen and their leaders will cause them to go through much bigger ordeal.

Watch California. What happens in California will indicate what will happen to the whole country.

For short term, just watch dollar, bond yields, commodities and be ready to short the stocks.

Just remember there is no green shoots. Also remember the run on oil, bond yields and commodities will not be sustainable because their own rise will lead to their own free fall. They are used as a pressure by the market dynamics to force government to revert back to correct policy making. Buy them when government issues wrong policies and sell them when the bad outcomes from these policies become obvious to everybody.

I believe a large part of the slopers will share the same view as I described above and hope this could make you feel better about the big picture and will not be confused or frustrated by the daily market fluctuations.

frank zhao

JUNE 14, 2009 1:58 PM

Next Monday:
gld-->spx down
TLT-->spx down
USD-->spx up
cpce-->spx up
vix-->spx up
TNX-->spx up

Elliott Wave Guru Sees Dark Days Ahead

By TIERNAN RAY | MORE ARTICLES BY AUTHOR
One of America's most famous market forecasters thinks that investors should play it safe with their investments.

ROBERT PRECHTER, THE market forecaster who told investors to sell their stocks weeks before the October 1987 crash, is back in the news.

Prechter, head of market-forecasting firm Elliot Wave International and author of several books, including Conquer the Crash (available from Amazon.com), has been quoted recently as saying that the current recession could last for a long time and even force stock markets back down to levels seen at the market bottom reached in March of this year.

Barron's caught up with Prechter by phone this week to understand the technical trading signs he looks at to draw conclusions about investor sentiment.

Barrons.com: You've said that today's recession represents a very deep and prolonged decline, akin to the 1929-1932 depression. What's your reason for viewing things as so dire?

Robert Prechter: My model is that naturally occurring waves of optimism and pessimism, which result from unconscious herding, are the driver of financial and macroeconomic trends. Upon rare occasion, waves of very large degree come to an end. In the financial realm, when people get more pessimistic, they sell stocks and curtail credit. They also take fewer risks in the realm of production, which causes the economy to contract. Taken together, these changes -- at very large degree -- portended a downward revaluation of the stock market, a deflation in credit and a depression.

Q: By what measure are you judging this pessimism?

A: Aside from price patterns per se, we track waves of social mood by way of psychological indicators. At large degree, we use things such as price/dividend, price/book and bond yield/stock yield ratios, mutual fund cash percentages, the number of investors bullish vs. bearish, credit spreads, savings rates, consumer sentiment, duration of optimism, and so on. From 1998 to 2007, these measures set records. P/E is still setting records. Optimism occurs at tops, and the more extreme the optimism, the bigger the degree of the top.

Q: Some observers allege that steps taken by President Roosevelt during the early part of the Great Depression ended up prolonging the depression. Will policy decisions being enacted now ameliorate or exacerbate the current decline?

A: Governments' policy decisions hamper and ruin economies all the time, but their meddling does not affect waves of social mood. On the contrary, waves of social mood generally spur governments to act. The 1929-1932 collapse caused the government to get restrictive and separate commercial and investment banks in 1933; this was after the bust it was designed to prevent was over. The 1990s boom caused government to get frisky and repeal the act in 1999; this was just as the boom it was designed to foster was ending. These policy decisions did not cause any changes in social mood, but the social mood trends predicted the character of the policy changes. Government herds, just like everyone else, but it is at the tail end of the herd, because it takes time for a consensus to develop so extensively that government has the public support to act.

Q: While the Federal Reserve's FOMC Wednesday said the slump will be worse than originally expected in the next three years, others are convinced that the "less bad" data points could lead to a recovery in the second half of this year.

A: Social actions result from social mood change. When we recognized a temporary low in pessimism in late February/early March, we were able to predict changes that would result: stocks would rally, credit spreads would narrow, housing sales would pick up, and authorities would take bows for effective "liquidity" and "stimulus" programs. If it goes high enough, a consensus will probably develop that the bear market and recession are behind us. Then it will be time for the next wave down.

Q: You've been quoted as suggesting people invest in Treasuries, considering them "safe cash proxies," but you've also said skeptical things about Treasuries given massive borrowing and the threat of deflation. Which is it?

A: It's a matter of short rates versus long. The best investment stance for conservative investors has been simple: safety. My primary recommendation is safe-cash equivalents. This means Treasury bills, Swiss money-market claims, some New Zealand bonds, some gold and some cash. There has been no change there. Cash has been good. Today you can buy twice the house, twice the stock shares and twice the gasoline that you could a short while ago.

But long term, Treasuries are different. After 28 years of rising prices for T-bonds, the Fed announced in December that it would buy them. Part of the downturn in prices relates to an anticipated pick-up in the economy, which should in fact occur for part of this year; part is due to hyperinflation fears, which I think are misplaced; and part is due to early fears of eventual government default, which I think are not misplaced. If government rates go up, bond investors will lose money, while we bill investors will make money, at least until it's time to bail out of government debt entirely.

Q: Do you prefer dollars to other currencies?

A: My position is that the dollar is the most inflated currency in the world, so it has the furthest to deflate. In other words, because it is so sick, it is the currency most likely to rise during the deflationary period as dollar-denominated IOUs collapse. Regardless, my currency mix includes what I consider to be very safe foreign debt and some gold. You have to realize that almost everyone loses in a deflation. The key is to lose a lot less than everyone else. Market opinions are one thing; safety is another.

Q: Your remarks as quoted in the press seem to refer essentially to the U.S. economy. What is your view of the rest of the world's economic prospects?

A: It's a developing global depression. Economies and societies are so closely entwined in the modern world that social mood is much more pervasively shared than it was centuries ago. So the world had a boom together, and it's having a bust together. The canary in the coal mine was Japan, which reached impossible-to-maintain extremes of debt and investment values a decade earlier than other countries did.

Q: So in spite of this market run-up, there's more misery ahead?

A: If you stay safe, it's the opposite.

郎咸平：高盛如何绑架美国政府

www.cnfol.com　2009年03月24日 10:34　新世纪周刊　查看评论

　　在200多年前，亚当·斯密出版了他的《国富论》，其中有一段是这样写的：大英帝国的统治者在过去的100多年里，让他的子民愉快地幻想他们在大西洋的西端，拥有一个伟大的帝国。但是，这个帝国到现在为止只是一个幻影而已，它不是一个帝国，而只是一个项目，一个计划。它不是一座金矿，而只是一座金矿的计划，一项需要持续、永久地支付费用的计划。这是一个非常昂贵的计划，如果情况照这种情势发展下去的话，为了维持殖民地的费用将难以估量。亚当·斯密认为正是那些大资本家绑架了大英帝国，广阔的殖民地不会给英国人民带来任何的实惠跟利益。对于占人口大多数的大英帝国的人民而言，他们只有损失而没有利润。

　　到了今天，这种大资本家绑架政府的行为再度上演了，只不过这一次，操作这种绑架行动的不再是产业资本，而是金融资本。

　　无奈的救市

　　美国7000亿救市资金的分配曾经备受关注，2008年12月，美国财政部终于决定：向银行注资2500亿美元，向保险公司AIG注资400亿美元(最终救助额达到850亿美元)，向美国联邦储备委员会的消费者融资计划提供200亿美元，向花旗集团提供250亿美元，另外还拨款234亿美元来救助美国汽车业。短短几个月的时间里，美国财政部已经将国会划拨的3500亿资金分派一空。于是在2009年2月，奥巴马不得不又一次提列8190亿美元的救市方案来振兴美国经济。

　　救了金融机构之后结果是什么？太有意思了。2008年他们搞得这么差，但他们2008年总共拿到的奖金是184亿美元，这和牛市的2004年一样。此外，花旗银行拿了这么多钱以后，我们发现，花旗银行的老总们准备拿出5000万美金去买私人飞机。AIG接收了850亿的补助之后，AIG的高管们花了500万美金，去世界的顶级海滩会所度假，气得美国参议院破口大骂。所以奥巴马总统就在2月初讲了一句话，他说华尔街的那些人不负责任到了极点，令人感到耻辱。我们应当做的，是让那些华尔街不断向政府伸手寻求救援的人表现出你们的克制、自控和责任感来。

　　奥巴马只能骂骂他就算了，他还能做什么呢？因为同样辱骂的语言，同样训斥的语言，也同样存在于19世纪的英国。我记得亚当·斯密就在《国富论》里面，也用同样的口气骂了当时的那一批资本家。亚当·斯密强烈地谴责资本家的贪婪，因为它摧毁了资本家的灵魂。这句话和奥巴马是不是有异曲同工之妙？花旗银行的老总拿出5000万美金给自己配备私人飞机，AIG拿出500万美金去顶级会所度假，2008年他们发给自己的花红高达184亿美金。他们从来就不在乎老百姓，因为他们已经绑架了美国政府。

　　由于金融海啸会使得大量的金融机构面临倒闭的风险，而这些金融炒家所孕育的金融机构一旦倒闭之后，将会冲击第二张骨牌，那就是打击美国人消费的信心，再冲击第三张骨牌，使得消费下降。再冲击第四张骨牌，企业倒闭破产。再冲击第五张骨牌，失业上升。再冲击第六张骨牌，消费下降。从而形成一个由金融海啸慢慢地冲击到实体经济的这么一个可怕的结果。

　　这就是为什么美国国会不顾那么多美国老百姓的反对，最终还是通过了7000亿美金的救市方案。然后美国政府就拿这笔钱，去帮助这些金融机构，希望把他们都救活了，救活了之后就不会影响到经济实体面了。

　　高盛，实在是高

　　我发现，在这一系列救助行动背后，有一个身影反复出现。

　　美国财政部要求美国银行收购美林，收购美林之后，马上换掉一把手，这个一把手是谁？名叫约翰·赛恩。他是谁？他就是一个最可怕、最大的国际金融炒家--高盛集团的人。还有，AIG注资850亿美金后也换人了，它的首席执行官也换成高盛的埃德·李迪。一个叫Wachovia的银行，注资之后它的主席也换成了高盛的罗伯特斯·蒂尔。也就是说，当美国政府拿老百姓的钱去救助这些受到重创的银行之后，他们的一把手或者主席全部都换成了国际金融资本的炒家--高盛集团的员工。

　　高盛甚至掌控了美国的政策。花旗银行的董事长鲁宾，就是美国前财政部长，他也是高盛的人。甚至美国政府注资解救的公司，这些人事的任命权，它不是在美国政府手中，而是在高盛集团的手中，由他们派人去担当要职。就是高盛这个集团，它是国际金融炒家最大最厉害一个，他们的人密布全国，掌控着财政、经济、政府、基金甚至股票交易所、证监会、期货交易所。

　　高盛在美国政府中一直保持着较好的声望，也在悄悄地操控着美国经济。而在与各大公司的交手中，高盛也多数处于获利的位置。华尔街曾经盛传，是高盛的背后操纵导致竞争对手雷曼兄弟的破产，《石油战争》的作者恩道尔也在书中多次提到高盛如何操纵石油价格。汇丰银行股价的连续下挫，以及很多中国企业损失惨重的交易中都有高盛的身影。那么到底是什么原因让这么多家企业失手于高盛？ 高盛又是用什么手法从全世界席卷大量资本的呢？

　　无处不在的高盛

　　我们不要认为高盛跟我们无关。任志刚，就是香港金管局总裁在2009年2月2日暗指汇丰银行遭到操控。被谁操控？下面是我的分析。高盛写了一个研究报告，说汇丰银行的坏账准备应该会高达301亿美元，亏损会高达15亿美元。因此这家银行的价格会从七八十块跌到49块。这个报告一出来，这个公司一周内就跌了四分之一的市值，股价一周内下跌25％。

　　高盛又写了一份研究报告，高度看空中国石油，虽然包括申银万国、中信证券、海通证券大力推荐中石油，可是以高盛为首的国际金融炒家发布相反的报道。因此香港的中石油H股一周跌了12.82％。那么高盛等银行在2004年，在国有银行要改制的时候，相继发表一些文章跟看法，诋毁中国的国有银行，说不值一点钱，说坏账太高了，不值钱，你们都别要。结果谁要了，高盛自己去买了。所以这就是为什么他们占有的美国银行以一块多钱的价格收购了建行上市的股权。结果在2007年下半年，美国商业银行对外宣布，由于次债危机，他们遭到重大损失，可是建行的上市呢，他们赚到了1300亿。100块乘以13亿人口就等于1300亿，就被这些大行席卷一空，相当于每人出了100元。

　　各位还记不记得越南危机？发生在2008年4月的越南危机是越南的大悲剧。可是我们注意到了，这个国家在2007年出了问题，可是到了2008年3月之前，以高盛为首的国际投行一再地呼吁大家买入。他们对越南的评价有八个字，叫做：越南概念，亚股新宠。这篇文章是2007年5月14日发表的，文中讲到高盛把越南纳入新钻石11国。在它的力捧之下，越南的股价、楼价拉高，最后到2008年4月呢，不知道什么原因，所有资金全部撤出，股价大跌，楼价大跌，只有一个不跌，就是通货膨胀高达25％。这就是高盛。

　　所以我完全有理由这么说，以高盛为首的这些国际金融资本，他们就是这一场金融海啸的真正背后操纵人。

Big picture from EW point of view by Prechter

Intraday TICK Divergences and Structure May 13

May 14, 2009: 9:49 AM CST

There were some interesting lessons to learn via the intraday action on May 13, 2009.  Let’s see some of them - particularly three TICK divergences and a fractal Elliott Wave pattern on the trend day.

First, we had a large-scale overnight gap (not scaled) which signaled that odds could be favoring a trend day.  The strongest trend days will gap down strongly and not even try to retrace a portion of the move, so the fact that Wednesday retraced a portion of the gap meant that odds for a “Type 3″ Tend Day were reduced… but we still got a powerful move.

A Bearish Rising Wedge formed (notice the 5-wave internal structure - classic textbook pattern) into the intraday highs on our first TICK Divergence.  I want to underscore the importance of TICK Divergences to you.

Price then ejected to the downside to retest the prior lows, and yet another TICK Divergence formed… which was good only for a small scalp as it was a counter-trend move (lower chance of profit).

Price then rolled back to the downside and formed another counterswing up into noon which then led to the strongest down-move of the day.

I’ve subdivided this wave into an Elliott Wave 5-wave Fractal, but more importantly, notice the positive TICK Divergence that formed once the five fractal waves had finished.  You’ll often see powerful inflections or reversals - often times absolute intraday lows - when you see this pattern:  An observable 5-wave structure that terminates into a TICK and/or Momentum Divergence.

Price did reverse, though not impressively, again because the overall structure was calling for a Trend Day Down.  Price chopped its way into the close.

On a separate note, the Breadth (net advancers minus net decliners) continued to trail lower all day (save for the end) which served as a strong confirmation of the continuation of the Trend Day down.

Review your intraday charts for similar lessons in order to better your skills at pattern recognition and intraday confirmation/non-confirmation (similar to what I’ll be advocating and teaching at the Los Angeles Trader’s Expo in early June).

Corey Rosenbloom, CMT

4/29/2009

3/18/2009 FOCM day

Blame Direxion

MONDAY, APRIL 20, 2009

Blame Direxion

Now I know many prefer the notion that a cabal of a few Big Evil Hedge Funds control the close each day. But perhaps it's something even more sinister, Big Evil Leveraged ETF's? Or rather, the rebalancing of swaps thereof. This, from the Journal(hat tip Don Fishback andAbnormal Returns).

At 3 p.m., do you get queasy just thinking about the toll that the final hour of trading might take on your portfolio?

New research suggests that on days when the indexes make big moves, leveraged exchange-traded funds could trigger a trading cascade, turning the market close into a buying or selling frenzy.

........The excessive trading set off by releveraging is perfectly legal -- but upsetting to many people. "The market doesn't seem like a fair, level playing field," says Andrew Brooks, head of U.S. equity trading at T. Rowe Price in Baltimore.

Now a respected analyst -- Ananth Madhavan, head of trading research at Barclays PLC's Barclays Global Investors -- has released a report arguing that the potential ripple effects of releveraging have been underestimated.

Leveraged ETFs usually generate a multiple of the market's daily return by using something called a "total-return swap." Imagine a fund with $100 million in net assets and 200% leverage, meaning that it seeks to deliver twice the market's daily return. That requires the fund to maintain $200 million in swap exposure.

In a long swap, a counterparty like a bank or brokerage firm agrees to pay the fund $2 for every $1 rise in the closing value of a market index that day. On the other hand, if the market falls, the fund must pay the counterparty 2-for-1.

Now let's say the fund's net assets grow by $10 million during the day, to $110 million. The fund must raise its swap exposure from $200 million to $220 million to honor its 2-for-1 investment objective. That is $20 million in extra buy orders, all coming into the market after 3:30 p.m., typically in the final 10 minutes.

An inverse fund also must buy on a day when the market is up; since the value of its hedge has gone down, the fund must increase its exposure to keep its leverage ratio constant. Thus, all these ETFs buy in lockstep in the last few minutes of an up day for their index -- and sell in a swarm at the end of a down day.

I had heard this was a factor in why moves often snowball late in a day. But what I hadn't heard, but should have just known, was something like this.

Further amplifying the ETFs' actions: Every day, trading desks at big banks and brokerage firms blast out customized spreadsheets to favored clients. These tools, linked to live data feeds, predict whether the leveraged ETFs will be buying or selling as 4 p.m. approaches. That enables hedge funds and other big investors to trade ahead of the ETFs.

So while it's "comforting" to know these funds aren't causing the melt downs or melt ups, good to know they're still using a stacked deck to profiteer off it.

As always with these sort of shenanigans, you'll go broke waiting for the SEC to reign it in. The best tack is to know it's part of the backdrop, and trade accordingly. If it walks like a trend day and talks like a trend day, it's probably a trend day. Which means you likely get a low and last, or high and last, sort of close. And in a world of popular Leveraged ETF's, and hedge funds getting The Look, it's probable that move will get exascerbated. So it pays to just trade accordingly.

http://adamsoptions.blogspot.com/2009/04/blame-direxion.html

Delta Neutral Options Strategy

http://www.thepitmaster.com/options/deltatrading.htm

The delta of an option is the rate of change in an option's price relative to a one unit change in the price of the underlying asset. For example, if a call option has a delta of 0.35 and the price increases by one dollar, the option's price should increase by 35 cents.

In the example above, the option has a delta of 0.35. Traders and brokers refer to that as "35 deltas." Simply multiply the delta by 100 to make it a percentage. Please be aware of that common convention. However, make sure you understand that "35 deltas" really means 0.35.

For the purpose of our discussion, whenever we mention the delta of an option, we are referring to the actual decimal value because that is what's actually used in all mathematical models. --The PitMaster

What exactly is Delta Neutral?

The term "Delta Neutral" refers to any strategy where the sum of your deltas is equal to zero. For instance, if you buy 10 call options, each having a delta of 0.60, and you also buy 20 put options, each having a delta of -0.30 you have the following:

(10 x 0.60) + (20 x -0.30) = 6.00 + -6.00 = 0

Your position delta (total delta) is zero, which means you are delta neutral.

The technique you are about to learn, is just one application of delta neutral. It is a general trading approach that is used by some of the largest and most successful trading firms. It allows you to make money without having to forecast the direction of the market. You can use it on any market (stocks, futures, whatever), just as long as options are available and the market is moving. It doesn't matter whether or not the market is trending, but it won't work if the market is really flat.

The principle behind delta neutral is based upon the way an option's delta changes as the option moves further in or out of the money.



Consider the following example:

Statistical Volatility 25.00%
90 day Tbill rate 05.00%
Option Strike Price 100
Days remaining 30
Price Call Put Delta
of option option of
underlying delta delta underlying

80 0.0013 -0.9987 1.0000
85 0.0148 -0.9852 1.0000
90 0.0843 -0.9157 1.0000
95 0.2668 -0.7332 1.0000
100 0.5371 -0.4629 1.0000
105 0.7805 -0.2195 1.0000
110 0.9226 -0.0774 1.0000
115 0.9795 -0.0205 1.0000
120 0.9958 -0.0042 1.0000

You will notice the following characteristics of an option's delta:

The absolute value of the delta increases as the option goes further in-the-money and decreases as the option goes out-of-the-money.
At-the-money call and put options have a delta that is right around 0.50 and -0.50 respectively.
Put options have a negative delta, which means if the price of an asset goes up, the price of a put option on that asset goes down.
Deep in-the-money call options have a delta that approaches +1.00. Conversely, deep in-the-money put options have a delta that approaches -1.00.
Deep out-of-the-money calls and puts have deltas that approach zero.
The delta of the underlying asset itself always remains constant at 1.00.
All of the deltas mentioned above assume that you are buying the options or the underlying asset, that is, you have a long position. If instead, you sold the options or the asset, establishing a short position, all of the deltas would be reversed. In the example above, if you sold a call option with a strike price of 100, and the price of the underlying asset was 110, the delta would be 0.9226 x -1 = -0.9226.
If you short the underlying, the delta would be -1.0 instead of +1.0.
Keeping all of this in mind, we can construct the following delta neutral trade:

Tbond futures price 110
Statistical Volatility 8.00%
90 day Tbill rate 5.00%
Option Strike Price 110
Days remaining 30
Price Option Option
of theoretical delta
underlying price

108 2.14 -0.73
109 1.43 -0.58
110 0.91 -0.42
111 0.53 -0.28
112 0.28 -0.16
Buy 2 Tbond futures at 110
Buy 5 Tbond futures put options (110 strike price) at 0.91 each

Delta of Tbond futures 2 x 1.00 = -2.00
Delta of put options 5 x -0.42 = -2.10
Total position delta 2.00 + -2.10 = -0.10

How it works:

If Tbond futures increase from 110 up to 112:
Profit on Tbonds = 2 x 2.00 = 4.00
The put options will decrease from 0.91 down to 0.28 (each)
Loss on put options = 5 x (0.91 - 0.28) = 5 x 0.63 = 3.15
Net profit = 4.00 - 3.15 = 0.85


If Tbond futures decrease from 110 down to 108:
Loss on Tbonds = 2 x 2.00 = 4.00
The put options will increase from 0.91 up to 2.14 (each)
Profit on put options = 5 x (2.14 - 0.91) = 5 x 1.23 = 6.15
Net profit = 6.15 - 4.00 = 2.15

We can summarize this delta neutral approach as follows:

If you buy the underlying and buy put options so your position is delta neutral:
When the market goes up, you have a profit on the underlying and you have a smaller loss on the options (because their delta decreased), so you wind up with a net profit.
When the market goes down, you have a loss on the underlying but you have a bigger profit on the options (because their delta increased), so again you have a net profit.


If you sell (short) the underlying and buy call options so your position is delta neutral:
When the market goes up, you have a loss on the underlying but again you have a bigger profit on the options (their delta increased), so you have a net profit.
When the market goes down, you have a profit on the underlying but once again, you have a smaller loss on the options (their delta decreased), so you still have a net profit.


When you do this kind of delta neutral trading, you need to follow a few rules:

Always initiate the position with a total position delta of zero or as close to zero as possible. So, your starting position is "delta neutral."
When the market moves enough so your total position delta has increased or decreased by at least +1.00 or -1.00 delta (or more), you make an "adjustment" by buying or selling more of the underlying asset to get your position back to delta neutral. You can also sell off some of your options to get back to delta neutral. But the point is, you make profits consistently by making these adjustments.
If the price of the underlying asset doesn't move around much, close out the entire position. You need some price action for this approach to work. If the market just sits there, time decay will eat away at this position.
Keep an eye on the implied volatility of the options you're using. If it moves toward the high end of its 2 year range, stay away from this position for a while. Otherwise, you might have excessive time decay in your options when the implied volatility starts to drop.
The options you buy should have at least 30-60 days remaining before expiration. Remember that time decay accelerates as the option's expiration date approaches, so if you allow more time, you minimize the time decay.
As you have seen, these trade positions benefit by price movement in the underlying asset. It puts you in the enviable position of being able to take full advantage of big price moves, in any direction. In fact, when the Dow dropped 171 points recently, delta neutral positions in the S&P 500 did extremely well.