High Tech High Speed Poker Game

Yesterday we saw a market "try to flat line," showing very flat and undefined futures, and hitting lows of 9790 before 11 a.m., again very very close to the 9776 support and resistance line that held the market during the first "great recession". We've hit this number several times during this sell off, and have always closed above it. The rest of the day we saw classic flatlining, through 1.30 p.m., then 2.30 p.m.
Puts were actually profitable yesterday to up to $1.00 per contract, and futures did not even reflect a strong downside. That is, until the 3 pm. hour when the market moved right to the 9774 resistance mark and where the puts we bought were profitable from a low of 4.35 to 6.90, for profits of up to 58%!!!


Right now a high-tech, high-speed poker game is playing out in the stock market, and billions of dollars are at stake. As the WSJ states "the adversaries are high frequency traders and big investors such as mutual funds. HIgh speed firms are using computers to detect large "buy" and "sell" orders to adjust their trades, and traditional investors are scrambling to trade "undetected."

So what is happening? It's become an escalating arms race,with technology receiving the power to trade faster and more efficiently. We saw it in the algorithms and rising use of computers, and a "traders" mistake that led the May 6th "flash crash."

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> A timely excerpt from our Monday Blue Chip Option commentary:
> Turmoil has marked events more this year than ever before.
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> Toyota was a crisis. Worldwide panic. News everywhere.
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> Toyota still has a good quarter, learns their lesson on quality control, and soon thereafter every major car company except Honda is hit with massive recalls also, but the “hit” is not there.
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> And from Toyota there was soon thereafter “the flash crash,” a 20 minute trading period in which companies that are well known actually hit zero, and more 25% trailing stop losses were executed by funds, individuals, and all of finance on the massive drop.
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> Okay, so some say it was a blip, and I’ve also read an intriguing study on how this 1000 point drop that shattered Wall Street could have occurred on a full Fibonnaci retracement….and on and on.
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> I don’t really care.
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> What I care about is that it does not happen again, or that if this is the “new way,” let’s get ready, and buy gold buillion and run.
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> What concerns me is that no one talks about it and you can find little internet feed explaining the true precautions being set up, or if they are; it is as if the exchanges see it just as a “blip,” “easily corrected with a simple remedy: the adoption of cross-market trading halts for individual stocks so that that buyers can catch up with the sellers and vice versa.” (Jim McTague, Barrons).
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> It goes back to the story of the circuit breakers, what we had been told in the past was “failsafe” for moves like this. Proctor and Gamble gossip cost us billions? Something is wrong.
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> Even VIX feels different. Buying fear is a good trade, just as selling confidence is usually a good sale. Sear, in Striking Point, says, “People are buying puts because fear is high , Vix at a lofty 35…..and remember the market’s mainstay strategy remains selling stocks to increase investment returns, or selling puts to lower the cost of buying stocks. 14 million contracts trade on an average day."
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> Much of that option volume is institutional: buying hedges,adjusting hedges, puts against positions taken. Options are an art, science, and card game.
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> The rules are changing in the card game.