Mark goes to market
Jun. 17th, 2005 01:47 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksSome odd things have been happening in the markets this month. For a start, any investor who followed the old adage of "sell in May and go away" will probably be looking at the rise in first world exchanges with mounting disbelief.
The US has said that interest rates are likely to continue to rise. The dollar is strengthening. Profits are lacklustre, and yet, and yet, the markets rise remorselessly. The Nasdaq is up about 10% in the past couple of weeks. Weird, huh?
Or maybe not. Here's the Birks theory. The hedge funds had a large number of short positions at the end of last month. A large number. Some of these were hedges against other positions (although it's a rare hedge fund these days that has anything to do with hedgeing -- "trend fund" would be a better name). However, others were naked shorts.
I suspect that some other players spotted this. Let's pick a random name out of a hat. Citigroup. Now, we all remember how it all went belly-up for LTCM in the late 1990s. So, Citigroup (and some other heavy hitters) start manoeuvring the indices upwards through the judicious purchasing of the right shares (or just buying the options on those shares). next thing you know, these naked shorts at the smaller hedge funds are getting margin calls, but they aren't hit in the way that LTCM was hit, because the market is more liquid these days. So they can close out at a small loss. Which pushes up the index a bit, which brings a few more hedge funds into margin call territory, and so on. next thing you know, you've got what deceptively looks like a rampant bull market, caused mainly by hedge funds under pressure closing out their short positions.
One sees this kind of thing time and again in currency trading. A market will have done very little all Friday, and then the dollar (say) reaches a high for the week against the yen. Next thing you know, its shot up half a big figure in the blink of an eye. All the week's dollar shorts are trying to get out at the same time. Then, as the margins are called, more short dollar positions are put under pressure and have to close out. By 7pm UK time you have seen a two-big figure shift, and no-one knows the hell why.
(It gets to be even more fun if the Bank Of Japan decides that this would be a good time to add a little fuel to the fire by putting in a "moderate" dollar buy order. A moderate BoJ order is like Gus Hansen sitting down in a £25 game at the Gutshot against the Mad Yank. Everyone else gets blown away.)
So, how far can this artificial bull market run? Until most of the short positions have been made to close out, I guess. 5300 on the Footsie? 11,200 on the Dow? 2260 on the Nasdaq? How should I know. I'm a lousy judge when it comes to these things.
The US has said that interest rates are likely to continue to rise. The dollar is strengthening. Profits are lacklustre, and yet, and yet, the markets rise remorselessly. The Nasdaq is up about 10% in the past couple of weeks. Weird, huh?
Or maybe not. Here's the Birks theory. The hedge funds had a large number of short positions at the end of last month. A large number. Some of these were hedges against other positions (although it's a rare hedge fund these days that has anything to do with hedgeing -- "trend fund" would be a better name). However, others were naked shorts.
I suspect that some other players spotted this. Let's pick a random name out of a hat. Citigroup. Now, we all remember how it all went belly-up for LTCM in the late 1990s. So, Citigroup (and some other heavy hitters) start manoeuvring the indices upwards through the judicious purchasing of the right shares (or just buying the options on those shares). next thing you know, these naked shorts at the smaller hedge funds are getting margin calls, but they aren't hit in the way that LTCM was hit, because the market is more liquid these days. So they can close out at a small loss. Which pushes up the index a bit, which brings a few more hedge funds into margin call territory, and so on. next thing you know, you've got what deceptively looks like a rampant bull market, caused mainly by hedge funds under pressure closing out their short positions.
One sees this kind of thing time and again in currency trading. A market will have done very little all Friday, and then the dollar (say) reaches a high for the week against the yen. Next thing you know, its shot up half a big figure in the blink of an eye. All the week's dollar shorts are trying to get out at the same time. Then, as the margins are called, more short dollar positions are put under pressure and have to close out. By 7pm UK time you have seen a two-big figure shift, and no-one knows the hell why.
(It gets to be even more fun if the Bank Of Japan decides that this would be a good time to add a little fuel to the fire by putting in a "moderate" dollar buy order. A moderate BoJ order is like Gus Hansen sitting down in a £25 game at the Gutshot against the Mad Yank. Everyone else gets blown away.)
So, how far can this artificial bull market run? Until most of the short positions have been made to close out, I guess. 5300 on the Footsie? 11,200 on the Dow? 2260 on the Nasdaq? How should I know. I'm a lousy judge when it comes to these things.
