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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Friday, October 1, 2010
Summary
Wall Street kicked off the first day of a new quarter on Friday with some solid gains, led by resource stocks after data in China showed a pick-up in manufacturing activity. Copper hit a two-year high, gold saw another record and oil moved above $80 per barrel. Occidental Petroleum closed up 3.2 percent to $80.77. However, the day’s activity felt the effects of data indicating that factory activity had slowed a bit. Also of concern was the fact that Friday's gains took place with volume on the low side.
For the week, the Dow Jones industrial average was
down 0.3 percent, the S&P 500 took a hit of 0.2 percent and the Nasdaq
was down 0.4 percent. The S&P 500 reached a key resistance level after
reaching 1,150.30 before losing ground. That level is viewed as the top
of a recent range after stocks surged during September. The third quarter was the best in a year with fears
over a double-dip recession fading on improved data and on expectations
the Fed will inject more money into the economy. The S&P 500 gained 10.7
percent in the July-to-September period. Meanwhile, options traders seemed to be pricing in
higher volatility for the near-term. The CBOE Volatility Index .VIX or
VIX, Wall Street's so-called fear gauge, fell 5.1 percent to 22.50. Yet
both the VIX and the CBOE Nasdaq Volatility Index .VXN closed higher for
four sessions out of five. Technology shares ranked among the laggards on
profit taking the day after indexes wrapped up the best quarter in a
year. Amazon.com ended the day down 2.1 percent at $153.71. In corporate news, Hewlett-Packard fell 3.1 percent
to $40.77 after the company named former SAP CEO Leo Apotheker as its
new CEO and president. Bank of America-Merrill Lynch downgraded Caterpillar
to "neutral" from "buy," writing that after a recent run-up in the
shares, it saw limited upside. Caterpillar ended the day down 0.6
percent to close at $78.22. Market regulators issued a report stating that a
massive sale of futures contracts by Waddell & Reed exacerbated the
market's rapid decline on May 6, in what has become known as the "flash
crash.
Crash Caused by a Single Trade
A $4.1 billion computer-driven sale by a single
trader set off the May flash crash that resulted in liquidity shocks
ricocheting between the futures and equity markets, according to a
report released on Friday. The report by the SEC and the Commodity Futures
Trading Commission did not name the trader. However, it became evident
that Waddell & Reed Financial was the party making the trade. The long-awaited report focused on the relationship
between two hugely popular securities -- E-Mini Standard & Poor's 500
futures and S&P 500 "SPDR" exchange-traded funds -- and detailed how
high-frequency algorithmic trading can rapidly reduce liquidity sending
the markets plummeting downward. "The interaction between automated execution
programs and algorithmic trading strategies can quickly erode liquidity
and result in disorderly markets," the report said. The "flash crash" sent the Dow Jones industrial
average plunging some 700 points in minutes on May 6, exposing flaws in
the electronic marketplace dominated by high-speed trading. The Dow was
down nearly 1,000 points at its lowest point on that day. Although the report did not make any
recommendations, it lays the foundation for a special commission to
propose new rules to avoid a repetition. Trading was turbulent that afternoon because of
concerns over the European debt crisis. Against that backdrop, a "large
fundamental trader" initiated a sell program to sell 75,000 E-Mini
contracts as a hedge to an existing equity position, according to the
104-page report. Apparently, on May 14, Waddell sold a large order of
E-Minis during the market plunge, identifying the firm to which the
chairman of the Commodity Futures Trading Commission. The CFTC did not
name Waddell in Friday's report because of laws that allow it to
withhold such information. Waddell's selling algorithm had "no regard to price
or time," the report said. That, coupled with the "aggressive" reaction
by high-frequency traders hedging their positions, led to two separate
"liquidity crises" -- one in the E-minis, the other among individual
stocks. Waddell's algorithm "responded to the increased
volume by increasing the rate at which it was feeding the orders into
the market, even though orders that it already had sent to the market
were arguably not yet fully absorbed by fundamental buyers or
cross-market arbitrageurs," the report said. These arbitrageurs transferred the selling pressure
to the stock market, sparking a "hot-potato" effect among high-frequency
traders that rapidly passed the same positions back and forth. The stock market, the report continued, began
plunging as trading pauses kicked in at individual firms, as
high-frequency traders became net sellers, and as market makers began
routing "most, if not all," retail orders to the public markets -- a
flood of unusual selling pressure that sucked up more dwindling
liquidity. The unprecedented flash crash called into question
many of the regulatory and technological changes over the last decade,
which ushered in an era of lightning-quick trading on dozens of mostly
electronic exchanges and alternative venues. Data to the beginning of this month show that funds
have exited mutual funds in every week since early May and the 20-day
moving average of the S&P 500's daily volume shows a slow decline since
late May. The flash crash report comes just as the SEC and the
CFTC have begun drafting nearly 200 rules required by the landmark U.S.
Wall Street reform legislation, which includes a revamp of the opaque
over-the-counter derivatives market.
More Fed Easing May Be On The Way Manufacturing growth slowed last month and inflation
remained subdued in August, leaving the door open for the Federal
Reserve implement another round of monetary policy easing. Data on
Friday also showed both consumer and construction spending rose more
than expected in August, but investment in private projects fell to its
lowest level in more than 12 years, Taken together, the data implied
economic activity rose modestly in the third quarter after growth slowed
to a 1.7 percent annual pace between April and June. Fed policymakers on Friday said more action would
likely be needed if the recovery stays weak. New York Fed President
William Dudley said high unemployment and low inflation were
"unacceptable," adding that more action was probably warranted if the
economic outlook didn't improve. Chicago Fed President Charles Evans
said more easing was desirable. Other Fed officials are doubtful over
whether more easing is needed. Treasury prices were down after the data and Fed
official comments, and the dollar hit a six-month low against the euro. The pace of manufacturing growth has slowed in
recent months; in September, the Institute for Supply Management's index
slipped to 54.4 from 56.3 and employment in the sector also fell. New
orders also slowed for a fourth straight month. Meanwhile, the Commerce Department said consumer
spending, which accounts for about 70 percent of economic activity,
increased 0.4 percent after rising by the same margin in July. At the
same time, the Fed's preferred measure of consumer inflation -- the
personal consumption expenditures price index, excluding food and energy
-- rose only 0.1 percent for a fourth straight month. In the 12 months
through August, the core PCE index increased 1.4 percent for the third
consecutive month. The Fed warned last week that underlying inflation
was below levels policymakers viewed as consistent with the Fed's
mandate of full employment and price stability. Holding back consumer
spending are a 9.6 percent unemployment rate and shrinking household
wealth as the economy struggles to recover from the worst recession
since the Great Depression. Spending adjusted for inflation rose 0.2 percent in
August, after a similar gain in July. The fourth straight month of gains
offered hope that consumers continued to prop up economic growth in the
third quarter. With spending a touch below the 0.5 percent rise in
disposable income, the saving rate edged up to 5.8 percent from 5.7
percent in July. Savings rose to an annual rate of $661.9 billion. Overall consumer sentiment also improved a bit in
September, with the Thomson Reuters/University of Michigan index's final
reading rising to 68.2 from 66.6 earlier in the month.
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MarketView for October 1
MarketView for Monday, October 1