TODAY’S THOUGHTS
Looking at the market action today I was reminded of a scene straight out of one of the many apocalyptic movies of the past several years. That one scene where the ground opens up. Mile long cracks appear in the pavement. Entire cars, trees, people, animals and cities are swallowed by Mother Earth.
The landscape shifted underneath the financial market today. Silver and crude oil were the first to be swallowed into the massive cracks that developed beneath them. Commodity names, in general, suffered greatly today. The CRB Index scored one of its worst days in many months. Casualties galore. A pronounced shift in the market landscape.
The interpretation of today's action is simple: a massive number of speculators were positioned in commodities and when the hammer finally dropped, they all scurried for the same exit. Wall Street in 2011 is not a diverse environment of unique thinkers and a multitude of strategies. What we have is an environment dominated by professional investors that were raised on a school curriculum of creating alpha by jumping on intermediate to long term trends. They then ride the wave until the point when they are forced off.
The strategies will have different names. Some will call it global macro. Others will call their fund a hybrid approach. You have systematic traders. There are equity long/short guys. Some guys like to call themselves event driven. When it comes down to it a majority are after performance and will tailor their research around what is performing. Got that? I'll say it again. They tailor their research around what is performing. Performance dictates their fundamental outlook. If the performance is there, the research will be created to justify the position in almost any strategy. That's Wall Street in 2011.
Should the trend of mass slaughter across the board in commodities continue, the repercussions will spill over into the equity markets. It already started during the final hour of trading today. Stocks wanted higher, but were pushed down as the slaughter in commodities became a punch to the gut of equities.
I am not going to pretend to be smart enough to tell you what the market action will be after a day like today. I'm especially not smart enough to tell you what the market action will be after a day like today AND an employment report being released in the morning.
I am experienced enough, however, to say that action should be kept to a minimum at points like this. There are plenty of "in between" points in market trends where you have high percentage opportunities. At points like this you are essentially flipping a coin. This is, after all, a game of odds. Why push the action when the odds don't favor your play?
