Last chart of the Day. Yesterday’s reversal was confirmed today. Let’s see the action tomorrow. The retracement from the early August collapse topped out at 50%, and we should be looking for new legs down in the coming days.

While everybody cheered today’s figure, let’s not forget the trend. The trend is pointing down, clearly sending the double dip signal. Two important charts by Macro Story.

Some good points by Stiglitz on Crisis, Contagion and the need for a New Paradigm. Full presentation, Stiglitz Presentation.

•Didn’t predict the financial crisis –Standard models assert that bubbles can’t happen –Standard models assert that shocks are exogenous

•Key “disturbance” to the economy was endogenous –Policy frameworks suggested that (a) keeping inflation low was necessary, and almost sufficient, for stability and growth; (b) government didn’t have instruments to prevent bubbles; (c) cheaper to clean up mess after bubble broke

•Even after bubble burst, economists claimed effects “contained” –because of diversification –because markets have good “buffers”

As the Market surges on ISM, the DAX index is underperforming the Stoxx index. Considering the higher beta DAX, and it’s underperformance, there could be some catch up in the DAx vs STOXX spread. Stoxx is taking out yesterday’s highs, while the DAX still trades some 100 points lower. Either the DAX is too cheap, or the market too expensive. Let’s see how this reacts if ES futures start dropping below 1210….

HFT provide liquidity and great spreads, at least according to the Exchanges. The problem is the Exchanges get paid by HFT Firms, and also lack the understanding of what HFT Algos actually do. From Nanex on “Overloading” the US Options Market.

On August 10, 2011, at 9:50:16.467, someone sent 8,557 quotes for 522 option contracts on the stock BIDU (Baidu) in 1 millisecond. This is equivalent to 8.5 million quotes per second, about twice OPRA’s current capacity. The quotes were sent from each of the 9 option exchanges that trade BIDU options. The net result was the overload of OPRA multicast line #7 which affected all option contracts that are quoted on that line (Symbols BH – BTZ). The line first became saturated (full) for 50 ms, then went completely dead for 60 ms, and finally took another 40 ms to recover.

The same morning, there were quotes from 440,516 option contracts for 3,470 stocks and indicies.  This event was caused by just 522 option contracts on one stock. In fact, the top 133 of these contracts had enough quotes (an average of 39 each) to cause a problem. What would be the impact of a similar event involving 10,000 contracts? Or 100,000 ? Or all 440,516 ?

This event shows just how easy it is for someone to overload a critical data feed and go unnoticed by others, even the exchanges.

The cause of this event had to be intentional as it involved the close coordination of sending a measured number of quotes to each of the 9 options exchanges. It also appears that traffic from each options exchange hit that exchange’s unique outbound capacity to OPRA. This event may have been a test to measure latency, but August 10th, which was already a very stressful trading day, would have been a poor choice to unleash a test that would certainly overload OPRA and everything else processing that data. Also, each of the quotations used were clearly marked as either regular or auto-executable quotes.

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Review of Precious Metals, Equities, Commodities, Bonds and Currencies
August was a very turbulent month for markets with equities falling sharply and commodities mixed on Eurozone and United States sovereign debt concerns and concerns about the health of the U.S. and global economy.

For many markets, Augusts’ savage sell-off has been the worst since the October following Lehman Brothers’ implosion and investors diversified into havens such as high credit government bonds and gold.

Gold again proved its safe haven status recording strong gains in the face of turbulent markets globally.

G10 Currencies and Precious Metals in US Dollars in August

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Remember the Greek problems being solved a couple of days ago? The World was cheering, by taking Athens Index higher in the biggest move up in decades. Well, sorry to spoil the party, Athens index has erased that move and trading at the lows, while SPX is somewhat higher…….

Quick update of the SPX Technicals. Note we have formed a dead cross in SPX, just like we showed the Dow Jones also completed it’s dead cross (50 day moving average crossing the 200 day moving average). Note how the SPX has retraced exactly 50% of the move down. The bounce has been on rather poor volumes. The trader argued we could see this bounce last week, therefore our short term targets are reached, and we believe the markets will soon turn down, and “surprise” the new bulls.

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