Just as it seems the market might finally break its 150-point swing record on this option expiry day. The Dow managed to extend its record during the afternoon trading. If there is any console investors can get, it is the volatility that didn’t rise much during the market’s drop. But this may have something to do with the upcoming holiday week. Warnings from both FedEx and YRC should not be taken lightly as there is an increasing possibility now that the credit market problem may indeed spread to the real economy.  One last word: do not trust the market behaviour during the final twenty minutes of today’s trading as that is mostly manipulated due to option expiry related activities.

We had another triple-digit-swing day on Wall Street for this Thursday. So far in this November, Dow has more than 150-point movement in each of its trading days and this volatility trend may continue for a while. As mentioned before, today is the last day hedge fund investors can redeem their money so volatility is not unexpected. What really puzzled me at this point is the continuous worsening situation in the credit market: nearly all the spreads are higher than August.  Precious medals were also getting sold off sharply with gold leading the decline. Apparently, the yen unwinding trade is still ongoing. Treasury bonds seemed to be the only safe place to be these days with 10 year government bond trading at a yield of only 4.17%. Other than the defensive sectors, all sectors were sold off today as investors are clearly fleeing the market. During this kind of turbulent period, remember that less action is better than more action and always stay calm when others are in panic --- sooner or later, the market will go back to normal.

The market was relatively stable all day until the final 30 minutes. This has become a pattern recently, that is, there is a sharp sell off and quick pickup in volatility during the last 30 minutes of trading. Rumour is that there is a big institution holding a vast amount of forward contracts in VIX and that institution is trying to manipulate the volatility in the market. Although I don’t know how much credibility should be given to the rumour, it does reflect overall nervousness among investors.
News on the economic front this morning was mostly positive. There is no inflation showing in PPI numbers. Tomorrow we are going to get CPI numbers, which will be more important. Oil price rebounded by almost $3 a barrel and tomorrow we are going to get the weekly inventory data. Right now the market is expecting a small withdrawal. However, due to the backwagon of the future prices, it is quite possible we are going to get a bigger withdrawal number and this certainly will add additional pressure to its price.

All three major indexes are set to close up by more than 2% on this Tuesday. It is truly a remarkable day for the bulls as just 24 hours ago, the market looked so fragile that even a straw may break it. The main trigger cited for today’s rally was Wal-Mart’s better than expected earning and guidance. Of course, if this were 10 days ago, even ten Wal-marts reporting results at the same time couldn’t generate the same effects. The market deserves a short-term rebound anyway. However, it is still too early to say this is a true reverse or just a sucker’s rally. Just like three months ago, this week contains both option expiry date and hedge fund withdrawal deadline day. So we may need to wait until next week to see where it will bring us.

The Dow is going to close below 13000 for the first time since August 16th. Why this is an important date? For one thing, this is the last time we got a 10% correction for that index after several years’ good run. Second, it is also August 16th that marked the trough of that correction and both Dow and S&P created new historical highs soon after. But will history repeat this time? Not so quick. And I’m going to explain below.
Other than well-known fundamental reasons (housing, financials…sounding familiar? These are exactly the same reasons causing the August sell off), there are some technical factors in play and how soon the market will come back to fundamental will more or less determine how the market will end in 2007 and even beyond. I will identify two main ones here(and there are a few minor ones but focusing on the main ones are more important): a). Unwinding of yen carry trade --- this is a hedge fund heaven trade for the past 7 or 8 years. As the interest rate in Yen is incredibly low(at one point even went negative, i.e. being paid for borrowing), investors borrowed in yen and then converted the Yen into other currencies(mainly US dollar) to purchase risky assets. This strategy has been working so well and actually some investors took it for granted that this strategy would work as long as the Japanese Central bank doesn’t raise interest rate aggressively (and to-date this hasn’t happen). In the meantime,  they all happily collected the so-called spread gains between high yield assets and low yield loans. If they only use their own money to play then I guess this strategy may indeed work. However, those hedge fund managers were not satisfied with 5 to 7% spread yield and instead, they turned to a great tool that can potentially enhance their returns many folds. That’s right --- they employed the leverage to such a strategy. Once you are using leverage, risk can quickly get out of control and this is exactly what’s happening now. As investors are trying to sell their risky assets(read as commodities, equities) amid uncertainty, they suddenly find that so many people are trying to do the same, i.e. dumping risky assets and buying back Yen. In short, this yen unwinding trade has the potential to cause big swings in the financial market. b). Unwinding of so-called long tech and short financial trade. Since the August low, some hedge funds are betting tech would outperform the general market while financials would be lagging. And this strategy worked extremely well as the tech companies were indeed delivering better than expected results in general. However, as some funds have to raise funds to meet their yen carry trade margin call so they have no choice but to cover their long tech and short financial trade. The result is exactly what happened during the past few sessions: heavy selling in tech stocks and rebounding of financial stocks.
Both oil and gold prices dropped big today while the US dollar rallied from its recent low against major currencies (of course Yen is an exception). All emerging markets are sold heavily as some people are afraid the 2008 Beijing Olympic can repeat the Y2K event back in 2000. Although I agree this view has some merits, I don’t believe all apples taste equal. Right now investors are blindly dumping bad apples along with good ones (as can be seen by the highest VIX level in more than four years), so it may indeed provide some harvest opportunities for those well-prepared investors. Stay tuned!