Wednesday, August 15, 2007

Dow Slides 167; S&P Down 20; VIX Nears 31

Is this.. The Beginning of the End?

No, those weren't giant grasshoppers - those things climbing the buildings were OTC Derivatives - invading the futures markets in Chicago! I love the way the lady screams and knocks the 1000 pound desk right over.

All kidding aside. It was another ugly day. While a test of S&P 1400 looms, something blogged about over the weekend, and may come as early as tomorrow morning; an oversold bounce is not out of the question, BUT that will largely depend upon the news of the coming days and how open interest looks on indexes going into expiration Friday. Interestingly, the market is also on the verge of another dubious milestone - a 10% decline, or the first 10% correction in the 4 year old bull market which could happen tomorrow.

Carry trade unwinding has started to have more than a whiff of forced acrimony to it and that's where things will get very interesting in the coming weeks. The stock market down around 9% from the top has been gripped by fear and selling, but for something closer to panic one needs to look at the yen carry trade situation. Going into deeper levels of forced unwinding, the yen carry trade unwinding could bring us to a new level of danger and volatility in the stock market and could spur real stock panic. The Dow was down 167 today... that's not a panic drop.

As I mentioned the other day, the August Countrywide in the money straddle was pricing in a move of at least 10% in the stock, and we got it today. Merrill put a note out this morning about bankruptcy possibility. Angelo Mozilo, the founder and ceo, age 68, has sold around $72 mln worth of CFC over the last year or so. It's hard to imagine a company with 54,000 employees going under, but we've seen Enron, Delphi, Worldcom, a bunch of airlines, etc go belly up, so why not CFC? With a market cap of $12 bln, CFC sure doesn't qualify to be on the list of "too big to fail".

My options screener has had a lot of other interesting activity on it.

Over 5,400 IMB September 10 puts traded today vs open interest of about 1500. IndyMac closed at 19.
There were also a bunch of big put trades in the December 27 and 28 XLF strikes.
LEH Jan 42.5 puts also interesting - over 5k traded vs open interest 1384. LEH is a $52 stock.

Tomorrow's Heard on the Streeet column of the Journal highlights Beazer's BZH woes, a stock I love to hate.

Fasten your seatbelts for more fun and games Thursday. Tech was pretty firm until the last hour and a half of trading - many bulls still out there trying to catch the bottom - that a panic does not make. We're no where near full capitulation. WIth the market down just 9% from the high vs the overall gains of the bull market, some make the bad assumption that folks are irrationally selling. Maybe it's no so irrational if it's, say, a bunch of folks locking in some nice gains from the last four years of a great bull market and not just the hedges dumping? I find it ironic that the folks who use the "fear monger" accusation are actually the ones creating fear with faulty theories and calling bottom after bottom which creates fear when the bottom doesn't lock in. But that's another post for another time.

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