The AP Hack Crash Facts

The first article of mine that was picked up by the Sandusky Register was written in the late afternoon on May 6th, 2010 as I put together the notes for our clients explaining the “Flash Crash,” what and how it had happened. Tuesday afternoon the Twitter account of the Associated Press was hacked and the following tweet was sent from their account, “Breaking: Two Explosions in the White House and Barack Obama is injured.” The stock market plunged one percent in less than three minutes. Within five minutes, it had returned to its previous level. Let’s take a look at some of the issues this brings to the trading table.

The market is always the boss. Traders at their desks can employ a thousand models suggesting the market should move in a certain direction. However, anyone sitting at a trading desk or on the trading floors will tell you, when you’re in the market, you’re playing the market’s game on the market’s terms. Therefore, when prices move rapidly and unexpectedly against a trader’s position self-preservation kicks in and the trader exits the position – THEN searches for the catalyst that suddenly turned the market against them. Rule number one in trading is self-preservation.

This mentality is best evidenced by protective stop loss orders that automatically trigger when a market moves beyond the trader’s loss threshold. Meanwhile, another group of traders prefers to exercise their own orders in which case, they’ll manually enter their order as the market exceeds their pain tolerance. These two groups were the ones hit with losses as they raced each other to the bottom in an attempt to unload their positions. For the record, our protective sell stops were also hit on the way down. Think of it as a bank run. There’s always enough cash to cover the withdrawals of those at the front of the line.

The traders most deeply affected by the sudden downdraft and ensuing return to normalcy were the day traders and the high frequency traders. Our position in the Russell 2000 stock index yesterday was a day trade on the long side of the market based on follow through from Monday’s outside day. Monday’s outside day is defined by falling through Friday’s low only to turn around and close above Friday’s high. This is a very bullish signal when coming at the extreme of a recent move. This outside bar combined with some other analysis put us on the long side. Protective stops had been placed and adjusted throughout the trade leading to a small win. In this case, not placing a protective stop would’ve been much more profitable but, what if the Associated Press had been right?

Once the market began to sell off, high frequency traders joined in the game. High frequency trading is day trading without the human input. Humans write the computer programs and the programs being fed the live data stream automatically executes the trades at the exchange. These programs have replaced the scalpers you’re used to seeing on TV in the trading pits yelling at each other. High frequency trading gets a bad rap for increasing market volatility but gets no credit for providing market liquidity. Liquidity is THE most important aspect of U.S. financial markets. Liquidity is why we are the global financial capital. Without liquidity there is no one to take the other side of the trade. Without liquidity there is no market.

Finally, let’s put it all together. The market was quietly trading up about half a percent on light volume when the AP’s tweet was posted. Volume exploded by a factor of 10 as the market declined. The volume surge that was taking day traders and tightly placed protective stops out of the market was being replaced by high frequency trading programs that are ALWAYS called to action by volatility and volume. Ironically, the same high frequency trades that made a killing during the flash crash actually got burnt by the, “Hack Crash” as the market returned to normal faster than newly initiated short positions could be covered at a profit.

There is little predictive value in the events of the, “Hack Crash.” However, there are some key takeaways for traders. First is the importance of protective stops. One never knows what could happen next. Second, verify news reports. I have the AP’s iPhone app, which alerts me to breaking news and had no mention of the tweet until after the fact. Therefore, the corporate disconnect between Twitter and their app was my first clue it was bogus. Finally, cut the high frequency traders some slack. Their programs are based on risk and reward just like our own and the liquidity they provide in times of dramatic events is exactly what allows us to get out of the market and keep some powder dry until the smoke clears.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Short Covering Spike in the Sugar Market

The sugar market is currently displaying a number of characteristics that truly define what trading in the futures markets is all about both long and short-term as well as trend and countertrend strategies. Looking at the sugar futures market from a long-term trading perspective it is easy to see that short traders have been in control of the market since the last upward spike in prices last July. The sugar futures have steadily declined under the growing certainty of a large Brazilian harvest as well as declining demand in a slow global growth economy. These factors have combined to push sugar to its lowest traded prices since December of 2010.

All the telltale signs of a solid trend have accompanied the sell off in sugar. For example, open interest has skyrocketed from approximately 70k to more than 350k since the July 2012 high. There are two reasons that open interest swells as the market moves directionally. First of all, the market allows the people who are early to put on the correct position to stay in that position. I know this sounds simplistic but traders with profitable positions can rest easy and let the market do its own work. Secondly, the increase in open interest is attributable to more people climbing on the trend. Other than a minor spike last October, most anyone who has initiated a short position in the sugar futures market has been rewarded with profits quite readily. These two factors work hand in hand inviting more people to board the gravy train of easy trend riding profits.

The downward trend in sugar futures is well founded due to the expectations of a huge 2013 harvest that should be led by a record Brazilian harvest. This is news that everyone is aware of and this fundamental information has attracted good traders to the sell side of the market. Technical traders have also had an easy go of it since what rallies there have been have been capped nicely by the 90 day moving average. In fact, the last time the 30-day moving average crossed under the 90-day moving average was in August of last year. Finally, technical traders on the short side have collected profits due to the orderly decline of the market thus far rather than getting stopped out on any spikes in volatility.

This brings us to the current situation and our reasoning for looking for a buy signal in a downward trending market. First of all, the ballooning open interest happens to occur as the market has begun to stall. The market has traded between 16.69 and 19.25 since February 1st. This is a pretty tight range considering open interest has more than doubled since then. This means that there are more than 150k new short positions in the market over the last six weeks. Furthermore, none of these new short positions have had the chance to accrue much in the way of profits.

Technically speaking, these new short positions should be sweating. The sugar futures made a new low for the move last week, trading down to 17.56 and followed it up with a new low this week down to 17.55. Last week’s trading range was merely 22 points. The last time the market traded that tightly for an entire week was in September of 2010. Furthermore, this week’s new low, by one tick, has now been followed by a breach of last week’s high at 17.78. This creates an outside bar on a weekly basis. This is typically a good reversal signal for the next couple of weeks.

The new short positions will have protective stops placed relatively close to the market since risk should always be the number one consideration when determining a trade’s appropriateness. This week’s action clearly showed that the market has run out of people willing to create new short positions under 17.55. Markets always run to where the action is. The declining ranges combined with this week’s reversal bar lead me to believe that the next move is higher.

I expect the market to make some type of bottom here. However, it is always important not to sell a rocket or, buy a falling knife. We will enter the market through the use of a buy stop order. This means we will only buy the market if it can climb high enough to trigger our entry stop, which will be placed at 17.85. We expect this to begin triggering buy orders all the way up as traders take their profits or losses, accordingly. I expect the market could trade as high as the 90-day moving average at 18.74. More likely, it will stall out between the trend line dating back to July that now comes in at 18.47 and the 90-day moving average, now at 18.74. If our buy stops are filled, we will place a protective sell stop at 17.59, which should limit risk to just under $300 per contract.

Rarely do we find a contrarian play so clearly set up and with such a high risk to reward ratio. If we are right, the market will get us in on the long side just as 150k contracts are washed out on the short side thus creating a technical bottom in line with the seasonal tendency of the New York July sugar futures #11 contract.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Impartial Review of the Monsanto Bill

President Obama ran for office in 2007 based on, “hope” and “change.” He offered hope for a better future and promised immediate change in the way agribusinesses market their product to the American consumer. This included country of origin labeling as well as labeling for genetically modified or, genetically engineered food sources. Last week, President Obama signed into law HR 933, otherwise known as the, “Monsanto Protection Act.” This refers; specifically to Section 735 of the spending bill that roughly states that bio-engineered seeds can be used without labeling while the court system decides whether or not they’re safe.

Presidential accountability notwithstanding, the real issue is safety, safety for the people, safety for the environment.  The safety issue can be broken down into three general categories. The group against GMOs is citing a paper published last fall in France titled, “Long Term Toxicity of a Roundup Herbicide and a Roundup-Tolerant Genetically Modified Maize.” This article has been championed by the naturalist group and vilified by the scientific community. I’ve read the paper, the charts and several rebuttals regarding sample size, experiment design, control validity and conclusions. The general consensus is that this paper should never have been published. The very short version shows that all of the rats in the study had tumors by the end of the two- year period. The first strike against it is that 96% of the strain of rats used will develop tumors in two years on their own. The science goes downhill from there.

Environmental safety focuses on the side effects the, “unintended consequences” of genetically modified corn and soybeans. These are the two primary recipients of Monsanto’s expertise because they are the two biggest cash crops in the US. The issues include runoff and leaching issues as well as any impact on local wildlife. The initial poster child for this was the Monarch butterfly. The Monarch butterfly only feeds on milkweed during its larvae stage. Milkweed is predominately found near cornfields. Considerable research led to a paper published in the Proceedings of the National Academy of Sciences of the United States (PNAS) in 2001. Their two-year study found a negligible effect between the exact modification of the seed and its effect on the Monarch butterfly population.

The science appears to be on the side of Monsanto. This is based on the third party studies into the seeds and the reviews of peer journals. The third party sources are necessary because of the billions of dollars Monsanto has wrapped up in proving the validity of their product. Meanwhile, activists of the pure food group are so full of personal feelings towards the issue that their opinions, stated with the highest degree of certainty, come to be accepted as fact even though there is no science behind them.

The President himself is a great example of the way this plays out in the public. We just stated that he signed HR 933 into law and this bill included what has become known as, “The Monsanto Protection Act.” However, why would a family who eats solely from their own organic garden, like the Obama family, sign something that limits food labeling? The answer is that they can afford to. Organic food is far more expensive. The President and his family will always be able to afford the luxury of locally sourced produce. Therefore, signing the Act won’t have the slightest effect on his family while his signature guarantees campaign contributions from agribusiness giants.

It’s a shame that a piece of legislation written by a former Monsanto employee, Senator Roy Blunt(R) from Missouri was literally, snuck in to HR 933. This ties in directly to last week’s discussion of the capitalist version of the Golden Rule. Monsanto and agribusiness have the gold to empower electoral candidates from grass root campaigns right on up to the President of the United States. If the President won’t allow food to be labeled for the rest of us, what shall we label him? Has the populist President been turned to the dark side? He clearly isn’t afraid to treat his family to the best while the rest of us fuel the cash registers of big business and their next election candidate.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.