Earthquakes come without warning. Everything could look normal, a picture perfect day and not a cloud in the sky.
Flash crashes are like earthquakes they come without warning. They are the outgrowth of poor diversification in those providing short term liquidity to the market place. We all trade based on our assumptions of liquidity. When we see millions and ten of millions of shares being traded in a symbol we are confident in our ability to quickly exit from a 20,000 share position. What if 75 pct of those shares were a bunch of computers ping ponging against each other all day. What if those computers just found it inefficient to trade that day. The depth of the order book is gone. No big institutional orders resting for our protection. No specialists, no market makers, not even the old fashion day trader to give you some liquidity. Poof its gone in a flash and the crash begins.
One thing is for certain after every earthquake there are going to be tremors. So if the trend holds, after every flash crash there will be mini (tremor) crashes. We all recently witnessed the flash crash and with that fresh in mind we will try to get out in front of something that looks potentially ugly and the Tremor Crash will begin.
Tremor crashes like the tremors that come after earthquakes have the warning signs. Some people get out along the way and that’s why they end up more contained.
Warnings: The world was over at 6600 Dow and now we are cheap at 13300, incredible complacency, Increase volatility, length in time of the up trend is excessive, Oil spike caused artificial strength in oils names. The oil strength was the reason for the recent out-performance of the SPY relative to the QQQQ. Daily 1 to 2 percent reversals of trend last few weeks are a setup to get used to the lack of follow through.
We are setting up for a quick 5 to 10 pct market move. Maybe I will be surprised and Gaddafi and Ahmadinejad will both go to Tibet and become monks and the market move will be 5 or 10 pct up but I doubt it so keep the crash helmets handy.
By the way we should be rooting for a quick and dirty flash crash to wash out the speculation. The slow and steady down draft is worse or at least from what I can remember from way back in 2008. Or maybe I just called the bottom with this blog. I will lose some money if it is and get out 1343 on the ES. 1200 – 1220 downside on the ES would be wonderful. The sooner the better.