Funny Action Friday: What Happened?

Many investors have written in asking me what happened on Friday. For those of you who weren’t watching the tape, stocks entered a free fall around 1PM Eastern Time. It looked like we were going to get another massive drop similar to the one that occurred at Thursday’s open.

However, suddenly at 2PM stocks began to stage a sharp reversal with virtually every major US index ramping over 1% in a matter of minutes. Having collapsed for days, stocks actually managed to close Friday at a gain.

There are a few explanations for this.

First and foremost, a number of rumors came out Friday afternoon concerning a potential Greece bailout either from the European Central Bank or the G7 Government meeting. Given the massive amount of moral hazard/ market props that have occurred since the Financial Crisis began in 2007, traders assumed Greece would be bailed out rather than default. Consequently, even rumors of a bailout were enough put a temporary floor under the market collapse.

Secondly, we need to consider the “Monday Effect.” As I’ve written about in previous essays, the market has begun a strange pattern of ramping sharply higher on Monday mornings. Traders are well aware of this and so are not willing to sit on their shorts over the weekend. After all, with 20 out of the last 22 Mondays featuring explosive opens, no one in his right mind wants to have the market blow up in his face and wipe out his gains of the last week.

Thus, once the market bottomed and began to rally, the shorts began to cover, pushing stocks higher. You can see how short covering really began to dominate trading around 3PM when the market went vertical.

Finally, we have to address the efforts of JP Morgan. Tyler over at ZeroHedge noted that JP Morgan’s ETF Desk bought a TON of S&P 500 ETFs (SPY) starting around noon. To see just how much SPY JP Morgan was brokering (either buying for themselves or one of their clients) look at the below chart provided courtesy of the folks at Zerohedge.

There you have it. Friday’s action was largely based on rumors and the shorts covering so as to lock in their gains rather than leave them running over the weekend. Throw in some heavy buying from JP Morgan and you’ve got the recipe for a massive reversal.

I’ll address where stocks are headed from a technical standpoint in tomorrow’s essay. Until then…

Good Investing!

Graham Summers

Ps. If you enjoy my daily commentary on the markets consider signing up for a subscription to my paid newsletter Private Wealth Advisory. With it you’ll receive a bi-weekly 12-20 page issue analyzing the market’s moves in great detail. You’ll also receive specific investment recommendations including entry and exit points for your positions.

To learn more about Private Wealth Advisory, click here.

Pps. While everyone else got slammed in the last few weeks, readers of Private Wealth Advisory have seen our entire portfolio RISE significantly. Indeed, four of our last five trades are already up (the fifth is break-even), three of them were only opened two weeks ago! To join us, click here now!