Wednesday, August 08, 2007

Traders show market fragility

Did you see what happened this afternoon? At around 2:30 the Dow was up 175 points. By 3:30 it was down 4 and it closed up 153 a half hour later. That doesn't look like pension funds, mutual funds, endowments or individual investors going haywire. One could therefore deduce that it's traders aggressively competing with each other, using rumor and aggressive positioning to pick off some meaningful profits if they win. Volumes were low in the afternoon and one can guess that the institutional investors had closed their books. Innocent bystanders could easily get hurt if they tried to play this game.

Why the title? An unattractive aspect of the limited number of hedge funds that are solely traders is that they pick on those in tough situations. In less volatile markets it's individual companies in myriad ways, but here's an example. Fragile Company X which has been going through a rough patch has scheduled a conference call with investors. Trading Hedge Fund M, and possibly funds N, O, P, and Q since these guys are thick as thieves, sets up or adds to a short position before the call. Fragile Company X gives its presention to listeners and opens the conference call to questions. After some questions that are constructive if perhaps not easy, a questioner from Trading Hedge Fund M asks "Could you comment on the rumor that... take your pick: you have taken a billion dollar loss on... ; you are under investigation by the SEC for... ; that your derivatives for hedging risk have blown up and the losses are... etc. Fragile Company X can basically say that they don't comment on rumors or stammer our some explanation saying that the rumor is completely untrue. The fact is that these hedge fund guys are smart enough to develop a rumor that, because of Fragile Company X's current challenges, is not beyond the realm of reason. You get it. The stock gets hammered if just for a short period.

In today's market the traders can pick on the entire market. It can simply be some program selling, a cascading of shorts and sells that reinforce each other, or an "intuitive" coordinated attack. Who knows. Buried in a Bloomberg report on the market day there was mention of a market rumor in the late afternoon, that rumor being that Goldman Sachs would be liquidated. Absurd rumor maybe but if it made the Bloomberg report it had some currency for a short period before it was put to rest. Who knows?

It does suggest that this market is still not on solid ground.

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