It's 9:30am and the Market is about to open. JP Morgan is already down 7% on the news that they lost $2 Billion in market value and their credit ratings trashed as a result of their failed hedging strategy. Their "Teflon" image shattered. Jaime Dimon, Wall Street's "Golden Boy" no more. You could hear investment attorneys all over New York sharpening their pencils, their eyes bulging with dollar signs ($$$$$) as they counted how much they would make on the investment failure.
JP Morgan not only brought itself down, it managed to bring down the entire financial sector with it. U.S. Congressmen immediately called for a hearing. Dallas Federal Reserve Bank President Richard Fisher announced that he was concerned that the biggest banks just don't have adequate risk management controls. A call for the break-up of the 5 largest banks could be heard around the globe. Why isn't the Dodd/Frank bill implemented? What about the Volker rule? JP Morgan has single handedly changed the investment world forever...
This month has definitely proven true the old adage, "Sell in May and Go Away." The $2 Billion loss announcement did not help. From its high of 13,300 in April, the Market dropped 500 points to 12,800 in just two weeks. Looks ominous for summer doldrums right around the corner. But wait. Hold your horses! It's Friday. Why was the news released on Friday? Surely they knew of the $2 Billion loss on Thursday or even Wednesday. Why release the news on Friday morning? Did they think no one would be around Friday morning so they could just somehow slip it in?
What did they know? It's "Counter-Trend Friday!"
Although little known amongst stock investors, "Counter-Trend" Friday is better known amongst Futures traders who buy and sell pre-Market. Here's what happened on Friday. The announcement is made about the $2 Billion loss. Futures traders, already actively investing early morning in the European Market, hear the announcement. Their first thought -- short the S&P 500 E-mini Futures contract. Short that with as many contracts as you can afford. Why? Because you know that with this kind of news release, the Market is sure to plunge. Over 400,000 short contract positions trade hands.
By shorting the S&P 500 E-mini, they succeed in bringing the Market value down over 10 handles (1 handle = 1 point). But behind the scenes, a few savvy Futures traders who fully understand the game afoot, begin to buy. Slowly at first, as many contracts as they can. No rush, so as not to alert the Market of the change in overall direction until they get their positions setup.
Tick tock, tick tock, with their positions set to Go Long, they wait for the Market to open. 9:30 arrives. Everyone fully expects the Market to plunge as laggy stock traders react to the $2 Billion news. But no! The Market roars back up and quickly recovers the 11 handles, eventually rallying up 14 handles on the S&P before coming back down. By 10:00, nearly 800.000 contracts have traded hands. Those who bought on the 10 handle dip have all made buckets of cash. . . "Counter-Trend Friday."
During the rally, there was something very interesting to watch...as soon as the 10 handles were regained, the excitement, the momentum driving the Market's rally went out, like the last flicker of life in the fireplace. The Market flattened, went up a little, and then slid back down for the remainder of the day. The savvy Futures traders made their profit and literally walked out of the Market.
Why Friday, as opposed to Monday or Wednesday? Simple. Futures traders cannot afford to hold contracts over the weekend. They want in and they want out of the Market as soon as possible.
For those unlucky stock traders who sold at the Market's open, or the even more unlucky options players who bought put options on the S&P, a word of advice from Futures traders -- "Trader Beware!" When you see the S&P 500 E-mini down 10+ handles pre-Market on Friday morning, and the number of contracts traded at 400,000+, don't sell, don't go short, don't buy put options, lest you fall prey to savvy Futures traders who put the game on in the first place.
And remember JP Morgan that started in game in the first place? During the Counter-Trend Friday rally, JP Morgan's stock regained nearly $2.00 of the $3+ that it had lost pre-Market. Watch it come back next week. So was it all a game? Was it all orchestrated? Who can say. All we can say is, it sure was profitable knowing the game was on.