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I am an equity option and futures trader. I have been trading the markets since 1979. More about me on my website
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Beyond the Chart
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  • 5 Smoldering Fires That Could Lead To A Black Swan Event 3 comments
    Apr 5, 2014 7:03 PM | about stocks: SMH, XHB, XLF, AAPL, BIDU, TSLA

    (click to enlarge)

    People thought that only white swans existed until a black swan was seen in Australia. Something no one thought possible.

    Per Investopedia a Black Swan event is:

    "An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader."

    It seemed that there was more of this kind of discussion 3-4 years ago right after the financial crisis, when the collapse was on everyone's mind. The Wall Street Journal even ran an article talking about how firms were selling structured products to profit from the next 'Black Swan' event.


    Now everyone seems to be trying to look at earlier charts to determine whether we are closely modelling another time period in the market. Remember in November the 1929 chart starting getting a lot of buzz. Today I just read an article about how someone thinks we might resemble 1987. I glanced at the chart and it didn't seem even close to me, but what do I know.

    Possible Black Swans

    The contrarian in me says that anything getting a lot of publicity is probably not going to happen. So back to the Black Swan events. Here are 5 smoldering fires that could erupt in some fashion that "no one could have predicted":

    1. Ukraine/Russia. Something goes horribly wrong and the event blows up and out of control before we know what happened. All it takes is one idiot.
    2. China's Economy. I've talked about this before and people are very concerned about the debt and financing that's been done in China to drive their growth. Just because they are a centrally controlled government doesn't mean that something can't get badly out of control in their financial system. We had our 1929 and Japan had its 1989.
    3. China and Japan. The territorial bickering has gone on now for at least a couple of years. There is still some long-held resentment about World War II by China towards Japan. With ships and fighters interacting in such a small area as the East China Sea anything could happen.
    4. Emerging Markets. An emerging market country's currency could unravel and have rippling effects throughout the globe. Everything is so tightly networked these days. This started to happen in January.
    5. War on Terror. We think we have the terrorists on the run. But do we ever really know? We thought we were watching everything in 2001 also. 9-11 reminds all of us that we should never under estimate the imagination for evil acts.

    Additional Dangers

    I also think that deflation is a real scary scenario that might be gaining a foothold in Europe. The central bankers think they can fight this, but they may be running out of bullets. It's almost like they think the cure for a hangover is more alcohol. But what alternatives do they have.

    And finally, high frequency trading. There's been a lot of talk about this because of Michael Lewis' new book, Flash Boys. His interview on 60 Minutes sent it viral. I hadn't thought about this much until I saw the article about the 1987 crash.

    Most people don't realize that program trading related to "portfolio insurance" was heavily involved in 1987 and cited as one of the main causes of the crash. And then of course we had the "flash crash" in 2010. But the markets have curbs in place to circuit break the system and prevent another flash crash. Ahhhh, I can sleep well now.

    Market Action

    The stock market this week was a little confusing. The Dow and SPX were both up for the week even after the big down day on Friday. But the Nasdaq was off big yesterday and down for the week.

    Right now the Nasdaq (NYSE:NAZ) and Russell 2000 (RUT) are in short term down trends. They are leading the market down and possibly into the much-anticipated and long-delayed correction. The Dow and SPX are still trending higher. So at what point do the indices get back in sync?

    Two things could happen. 1) A more severe down turn occurs that then pulls the Dow and SPX down with the NAZ and RUT and they all start trending lower together. Or 2) the NAZ and RUT bottom fairly quickly and rejoin the Dow and SPX moving higher.

    As I mention on the video, this is the first time that NAZ has closed below the 10 ema two weeks in a row, on a weekly basis, since October, 2012. And this week's close was slightly below last week. No guarantees, but the last two times this happened there was a few more weeks of selling to come.

    In Focus

    Today, in addition to the indices, indicators and ETFs, we look at Apple (NASDAQ:AAPL), Baidu (NASDAQ:BIDU) and Tesla Motors (NASDAQ:TSLA). On to the video.

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Comments (3)
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  • KJP712
    , contributor
    Comments (469) | Send Message
    Might be the HFT trader crowd may decide to take a few weeks off to let the noise die down.That may affect the trading volume resulting in a vacuum of buyers.A close watch is warranted along with the others on the list.I really liked this article,great effort.
    5 Apr 2014, 07:33 PM Reply Like
  • JoeHentges
    , contributor
    Comments (52) | Send Message
    Author’s reply » Excellent thought! And thanks for the comment.
    6 Apr 2014, 11:39 AM Reply Like
  • Anyoption
    , contributor
    Comments (1367) | Send Message
    Interesting article. Investors are often so sure of themselves about whether the market is going to go up or down, but it's important to remember that there are events like these that happen often enough to serve us up a little humble pie.
    7 Apr 2014, 08:51 AM Reply Like
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