“Every day I assume every position I have is wrong.
At the end of the day, the most important thing is how good you are at risk control.”
– Paul Tudor Jones
Just before the 1987 Crash several big name hedge funds were selling. How do I know that? Because our desk in the S&P 500 futures did business for many of the big hedge funds and investment banks and we not only saw the order flow, we were part of it. There was talk on CNBC and on the floor that a crash was coming, and it had the feel of it too.
A few minutes before the 8:30 open the phones would start to ring.The clerks at the desk were arguing as they jostled for a position at the desk. As order fillers and clerks assumed their positions in the pit, the desk guys started to put in their opening orders, screaming into the pit to buy this or sell that. Unlike normal times, there was an uneasy feeling in the air, and after the 8:30 bell rang in came the big sell orders.
First up were the girls from Pru Bache selling for Bruce Kovner. Then at the same time Tudor and Moore Capital (Paul Jones and Louis Bacon’s) direct lines started to ring, both shouting “sell 1,000 at the market.” They were good friends back then and most people thought they were in cahoots but we didn’t care because we had the biz!
As I usually did, when the desk started selling I would immediately pick up the UBS program trading line and scream at the guy to “give me a bid” and once the desk started unloading the S&Ps my bids turned into index arbitrage sell programs. Remember, the public blamed program trading as part of the cause of the ’87 Crash. Either way, some very big names were made back then, and Paul Jones from Tudor Investment led the charge.
For weeks leading up the the crash Tudor and friends were testing the waters, selling two or three thousand big S&P 500 contracts, then offering more as the futures sold off, but their timing was not exact. It’s my guess the big funds had a core short position and traded around it. All the big desks on the floor were seeing part of the selling but our desk had Moore Cap and from that Tudor came along. We had been doing the Caxton business for years through a well-known NY sales by the name of Steven Solomon who hired nothing but young Jewish women (ie Rose and Hope and others) and they would complain and scream at everyone all day. They were so bad the made the worst floor guy look like an angel. We did business for several other big accounts back then, like Bankers Trust, AIG, Thompson Mckinnon, CitiBank, Willow Bridge, George Soros, UBS and so many others. But the time leading up to the 87 crash was a very uneasy period and once the crash started we knew exactly what we what we were looking at and who the culprits were. While Paul Jones had already made a name for himself, nailing the ‘87 crash made him famous. But he didn’t invent a new way of making quick money in the S&P once it’s going down; he just capitalized on the move. The danger and the allure of the S&P has always been that it goes down faster than it goes up and that millions were made and lost in seconds in the S&P futures.
It’s obvious that all the comparisons between 1987 and the present are not valid. Despite the determination of the short-sellers, most of the selloffs have been limited in scope. A hallmark of the current rally is how quickly the the S&P recovers after it dips. Today the US government is over $17 trillion in debt, yet the stock market is only 1.5% off its highs. Back then the severe downturn that occurred in October 1987 was five days of nonstop selling that culminated on Oct. 19, known as Black Monday. I remember that day like it was yesterday. The Dow Jones industrial average fell 22% on that day and the New York Stock Exchange was unable to keep up.
As they did during the 2010 flash crash, some people pointed to the lack of trading curbs which are now part of the daily rules. Others say that program trading or S&P index arbitrage was at fault, while still others point to the Dow Jones Industrial Average more than tripling in price over five years and price-to-earnings ratios on stocks reaching above 20. All of these pointed to a very overbought and extended stock market.
As we’ve always said, it all starts in the S&P, and after its 20% decline, 19 of the world’s largest stock markets also dropped 20% or more. Like the 2007 credit crisis, the trading floors of the CME and CBOT were overloaded with business, but after the rush it took several years to bring the volumes back. It was an unbelievable time in the S&P pit. Some traders retired, they made so much money during that time, while others were told by their clearing firms to stay out of the pit.
After yesterday’s decision by the CME to close all of the futures pits with the exception of the S&P 500 futures pit, it’s possible that the remaining locals and order fillers could be the last futures pit in the world to see another crash. Will it happen this year? Will the locals make millions? Only time will tell. …
In Asia 7 out of 11 markets closed higher and in Europe this morning 7 of 12 markets are trading higher. Today’s economic and earnings calendar starts with the US employment report, Atlanta Fed President Dennis Lockhart speaks on monetary policy and the economic outlook in Naples, Fla., consumer credit and earnings from Alcatel-Lucent (NYSE: ALU), Aon (NYSE: AON), Dominion Resources (NYSE: D), and Marsh & McLennan (NYSE: MMC).
S&P 1.34% Of Dec 29th Record Close
Our view: What a wild, strange trip it’s been. The S&P 500 E-mini sold off from 2049.50 down to 2020.00 in Globex and then rallied all the way up to 2054.75 by midday. Anyone who says volatility and trade have not picked up needs to have their head examined.
Nothing trades at the same price for very long. Today the US government will release its nonfarm payroll employment numbers for December. The prior nonfarm payroll number came in at 252,000 after jumping a revised 353,000 in November. The consensus on the December nonfarm payroll is 230,000 with the consensus range of 215,000 275,000. I am a simple guy and when I look at the net changes of the S&P this year I can’t believe my eyes.
Our view is we think the jobs number will come in higher than expected. What we don’t know is what the S&P will do. We know the mutual funds have been buying all week and have been accumulating cash stocks and you could see it in the S&P futures all day yesterday. See MrTopStep’s trading rule Countertrend Friday and see you in the trading room.
To get your free copy of the Trading Rules ebook, click here. https://mrtopstep.com/mts-trading-rules/
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 of 11 markets closed higher: Shanghai Comp. -1.93%, Hang Seng -0.35%, Nikkei +0.82%
- Earlier in Europe 7 of 12 markets were trading higher: DAX -0.76%, FTSE -0.30%, MICEX +3.25%, Athens GD.AT -0.38%
- Fair value: S&P -4.92, Nasdaq -3.99, Dow -59.76
- Total volume: LOW 1.34mil ESH and 4.1k SPH traded
- Economic schedule: US Employment Report, Atlanta Fed President Dennis Lockhart speaks, consumer credit and earnings from Alcatel-Lucent (NYSE: ALU), Aon plc (NYSE: AON), Dominion Resources, Inc. (NYSE: D), and Marsh & McLennan Companies, Inc. (NYSE: MMC)
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