A global market slide that began with a bad industrial profits report in China extended to the US and Europe, with further pressure from crude oil, which resumed its downtrend after some gains last week.
By Vikram Rangala
Monday, December 28, 2015
Traders who watch order flow rather than looking for fundamental causes generally attribute the short-term rally of last week to short covering, With overall trends still pointing downwards in multiple markets, those who are looking to sell high and buy back lower are always looking for small upward moves to pounce on.
Algorithmic trading programs, even more than humans, are known for setting what are called bear traps, drawing traders into short positions, then driving prices up to where those bears have placed their stop loss orders, and triggering their stops. Stop-loss orders tend to be clumped at certain price levels. When they are triggered, it sets off a sequence of buying that drives prices still further.
This kind of triggering of short-covering rallies followed by opportunistic buying and selling at the extremes is easier to do when volume is low, as it is during this holiday period. The so-called Santa Rally may have ended by the night before Christmas. With low volume, not many creatures may be stirring today, but algorithms are active. They don’t alter trends, but they do extend the price movements, adding to volatility.
Several news events can be said to have caused last week’s short-lived rally and today’s drop, both in stocks and crude oil. Iran’s state-run oil company announced plans to add 500,000 barrels a day of exports once sanctions are lifted, pumping into an already huge glut.
Iran’s oil will help OPEC in its now-blatant efforts to squeeze North American shale oil producers out of business and keep them from taking market share. While few are bullish on shale, the impact extends beyond the energy sector. Many shale companies took on large debts to finance their expansions and eventually even their core operations, all on the bet that oil prices would continue to be $100 or at least above $50 a barrel. Now they are unable to make their debt payments and are in the same category as junk bonds.
The Shanghai Composite Index had its worst drop in a month as a drop in industrial profits added to fears of slowing growth in China. The government is threatening changes to the way in which stocks are listed, as well as ending a ban on sales of shares by large shareholders, fueling fears that the overall demand for stocks may drop. Continuing losses in the Russian ruble as well as the currencies of other oil-producing countries weighed on the European Stoxx 600 and later on the S&P 500 and other US stock indices.
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