JLN Options: Signs of a Bull Market Turning Bear; S&P 500 has best day in a year following Fed minutes; Hedge funds slip in September but stock funds fall more

Oct 8, 2014

Lead Stories

Signs of a Bull Market Turning Bear
Barry Ritholtz – Bloomberg
Yesterday’s sell off has the bulls worried. Major U.S. indexes fell about 1.5 percent. Ten of the past 12 trading sessions saw swings of 100 points or more in the Dow Jones Industrial Average.
The list of worries ranges from the strengthening dollar’s harm to U.S. earnings, the end of quantitative easing, Europe’s weakening economy and the International Monetary Fund’s reduced forecast for global growth. I am far less certain that those headlines are anything more than the excuses for the selloff, rather than the cause.
***DA: You are not wrong, Barry, just a wee bit early. The Fed let it be known today that it is in no hurry to end the zero interest rate party. So, for today, pile in!

S&P 500 has best day in a year following Fed minutes
U.S. stocks soared on Wednesday, with major indexes posting their biggest one-day jumps of 2014 after the Federal Reserve reassured investors that its first interest rate hike would not come until it deemed the economy could withstand it.

Hedge funds slip in September but stock funds fall more
Svea Herbst-Bayliss – Reuters
Hedge funds finally have a little something to brag about, losing less money in September than the average mutual stock fund manager, according to data released on Tuesday.
The HFRI Fund Weighted Composite Index, a widely watched performance gauge for the $3 trillion global hedge fund industry, slipped 0.4 percent in September, a month when the S&P 500 index fell 1.4 percent. The average U.S. stock mutual fund manager lost 2.92 percent, Lipper data showed.

More trouble coming every day: VIX funds win on down day
By: John Waggoner, USA Today
Are you worried? Anxious? Concerned that OH MY GOD IS THAT A BIG BEAR MARKET STARTING RIGHT NOW?
Just kidding. But if you made a big bet on fear Tuesday, you really cleaned up.
Exchange-traded funds that key off the VIX, the so-called fear index, soared during Tuesday’s 273-point meltdown in the Dow Jones industrial average. The VIX measures what options traders think stock volatility will be. People fear downside volatility more than upside volatility — hence the “fear index” moniker.

Market On the Verge of a Meltdown — Or a Short Squeeze?
Adam Warner – Schaeffer’s Investment Research
Yesterday, we covered the topic of volatility selling as a perpetual strategy. I realized there are a couple things I should make clearer:
I do think it’s a good strategy over the course of time. Options are almost always overpriced.
I don’t believe now is a particularly good time to initiate the strategy.
The major risk in rolling options sales is that you stumble on a major market correction and spike in volatility. I don’t believe that’s imminent. I don’t have a strong opinion as to whether we’ve topped, though I’m not sure that particularly matters in relation to this strategy.
***DA: Premium selling strategies are not for the faint of heart these days, that’s for sure. Although, had I been on a bender these past few days, I would have woken up and said, “Wow; nothing happend while I was out. The S&P is at 1960, exactly where I left it.”

Will buy-the-dip crowd rescue S&P 500 again?
Adam Shell – USA Today
Buy-the-dip has been a winning investment strategy since the bull market began in March 2009 and in 2014. Will investors snap up beaten-down shares again and halt the stock market’s recent slide?
Tuesday’s nearly 30-point, or 1.5% plunge, to 1935.10 for the benchmark Standard & Poor’s 500 stock index was its sixth-biggest point decline of the year, according to Richard Peterson, senior director at S&P Investment Advisory Services.
***DA: I’m thinking “yes.”

Here’s Why The Best Investors Ignore Market Crashes
Simon Moore – Forbes
In October 1987 the markets crashed. The New York Times headline called it “Bedlam on Wall St.” The Times of London called it “Wall Street’s blackest hours”. Trading volumes nearly doubled past records as investors stampeded for the exit. Stocks lost almost a quarter of their value after just 7 hours of trading, and the picture globally from London to Tokyo was similar. It sounds horrendous doesn’t it? Clearly, a reason to stash your cash under the mattress rather than risk it all on the capricious markets.
***DA: The best investors do not ignore market crashes; it is when they spring into action. Just think of the bargains Warren Buffett picked up during the crisis. Goldman warrants, anyone?

Volatility’s back, so get used to it
David Kotok – Yahoo Finance
An era is ending: for over half a decade, nearly worldwide, zero interest rates suppressed volatilities. That is over. The first sign of this evolution came over a year ago when the bond market experienced the “taper tantrum” as then Fed Chairman Ben Bernanke alluded to forthcoming rising interest rates. Since then, the re-volitization process has morphed to currencies, commodities, and stock prices.
More and exciting volatilities lie ahead.

Consultants fear mis-selling as forex brokers discover new options
Fiona Maxwell – Risk.net
Foreign exchange brokers – which execute spot and forward currency trades with smaller businesses – are now offering options-based structures to clients in the UK. Consultants worry about the potential for mis-selling as the trades they are seeing are complex.


ISE Holdings Launches Cross Market Speed Bump
ISE and ISE Gemini First to Introduce Risk Management Protections across Multiple Exchanges
NEW YORK, October 8, 2014 – The International Securities Exchange Holdings, Inc. (ISE Holdings) today announced the launch of the Cross Market Speed Bump, which allows Market Makers to establish a common risk threshold across both ISE and ISE Gemini. If the Cross Market Speed Bump is triggered, a Market Maker’s quotes are automatically removed across all products and new quotes are prevented from being accepted on ISE and ISE Gemini. This new protection is an enhancement to the existing Market Wide Speed Bump introduced earlier this year and is the latest in ISE’s industry-leading suite of risk management offerings.

Intercontinental Exchange Completes Acquisition of SuperDerivatives
October 8, 2014
ATLANTA & NEW YORK–(BUSINESS WIRE)– Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, has completed its previously announced acquisition of SuperDerivatives, a leading provider of risk management analytics, financial market data and valuation services. The acquisition closed on October 7, 2014 in an all-cash transaction of approximately $350 million.
“With this acquisition we will be able to offer our customers enhanced data and technology services and continue to grow our clearing offering through the addition of a strong foundation of financial market data,” said Jeffrey C. Sprecher , ICE Chairman and CEO.

Euronext opens Dutch and Belgian equity options markets to US investors
Following consultation with the US Securities and Exchange Commission, Euronext has received new class no-action relief for foreign options markets, enabling it to offer Dutch and Belgian equity options to certain eligible US investors.
The no-action relief applies to a broad suite of equity and equity index options.

TASE launches options and futures on TA-100 Index
The Tel Aviv Stock Exchange (TASE) board of directors has approved the launch of derivatives (options and futures) on the TA-100 index.
The new derivatives join existing products on a number of underlying assets – the TA-25 index, the TA-Banks index, the ILS/USD exchange rate, the ILS/Euro exchange rate, and 10 individual stocks included in the TA-100 index.

Regulation and Enforcement

Banks to change rules governing derivatives market
The world’s biggest banks have agreed to change rules that govern the $700 trillion derivatives market, the Financial Times reported on Tuesday.
Eighteen banks, ranging from Credit Suisse Group AG to Goldman Sachs Group Inc, have agreed to give up the right to “close out” deals on derivatives contracts if a financial institution runs into trouble, the newspaper said, citing people familiar with the matter.

Investors warn on crisis plan for derivatives
Philip Stafford – Financial Times
Institutional investors and pension funds have warned they may resist a plan by the world’s biggest banks to rewrite their derivatives contracts as part of reforms aimed at preventing a failing institution from destabilising global markets.
More than 90 per cent of the contracts in the $710tn off-exchange market are expected to be affected by new protocols agreed by the banks, which are set to be formally unveiled in coming days.

U.S. CFTC Clearing Rules Eyed for Some Currency Derivatives
Silla Brush – Bloomberg
Foreign-exchange traders, already subject to a global probe over alleged manipulation, may face U.S. restrictions on derivatives contracts for some currencies.
Commodity Futures Trading Commission members and staff are weighing whether to require that contracts for non-deliverable forwards be guaranteed at clearinghouses that accept collateral from buyers and sellers. The regulation would apply the clearing rule to contracts for a dozen currencies, including China’s yuan, South Korea’s won and Brazil’s real.


Fear: The New Value Stock
Steven M. Sears – Barron’s
Truth or consequences time on Wall Street starts now.
Third-quarter earnings season begins with Alcoa (ticker: AA ) announcing its results after the close of trading. Management teams will confront an agitated investor class that needs convincing to stay in stocks. Results and outlooks better be good. If not, stocks will get pummeled.

With Volatility In The Market, Buy These 2 Exchange Stocks
Zacks Investment Research
As global zero-interest rates come to an end, nearly half a decade of suppressed volatility will soon be coming along with it.  The first sign was around last year in May of 2013 when the Federal Reserve announced it would begin tapering back its $70 billion per month in bond and mortgage backed securities.
Just today, the International Monetary Fund (IMF) downgraded its global GDP growth rate from 3.4% to 3.3% and 4% to 3.8% next year and the markets are not responding well and the major indices are selling off in today’s trading.

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