By Ron Struthers, Posted Monday, June 21, 2010

Wow! What a weird set of events

First off, feel free to pass this newsletter onto friends, post on web sites, cut and paste, other newsletters feel free to pass on whole or in part, just reference my name and web site.

Everyone has to know what is going on in the markets, and how we are being ripped off!

I started working on yesterday's newsletter about 11 AM and finished about 1:30PM, took a lunch break and did the spell check and proof read a couple times. I logged back on the internet and started emailing out onto my 6 subscriber lists at about 2:30PM, it takes maybe 5 minutes, so while I was doing that I went to check on the markets and seen they were crashing, the DOW was down 500, a minute later 900 points.

I hit the stop button on the email and the last few lists I sent out on - I added a message

"Today or tomorrow could be the selling climax"

So some of you got that message and others did not. I went back and checked the markets and the DOW was only down 400, this whole crash and recovery occurred in about a 15 to 20 minute time frame. Real investors/people do not trade or react like that

Well I am not so sure about a selling climax because what happened yesterday was not real, as far as fear and panic goes. The market did not go down because of fear and panic or a selling climax. The market went down causing the fear and panic!

I have already read numerous articles talking about the plunge in stock markets related to fears on Greece and Europe, the US Economy, this and that whatever. Some say a bad trade was entered on Procter and Gamble. A spokesman for the exchange said there was no erroneous trade on Proctor and Gamble.

Comments like:

"We're not talking about a couple of companies going bust; we're talking about countries," said Peter Boockvar, equity strategist at Miller Tabak, of worries that Europe would not be able to contain debt troubles prompting riots in Greece.

I am sure you will read many analysts and newsletters talk about yesterday being a selling climax, a capitulation in the markets. Don't believe any of that, these people do not have a clue what happened,

Thursday's crash was caused by just one thing, computer trading, computer programs that went berserk. The computers lost their marbles so to speak

Computers Gone Wild!

Now there was a few articles and comments that were on the right track, like:

"The panic in the middle of the day was market makers that just disappeared, and every machine on Wall Street was trying to sell into a market that didn't exist. That was a bizarre electronic quant panic of people selling into a black hole," said Bookvar. What he should say is computers selling into black holes and dragging real investors and their money with them.

The U.S. stock market's rapid free fall Thursday afternoon was accelerated by program trading, which was triggered after a sharp drop in shares of Procter & Gamble and at least one other Dow stock, 3M , market watchers said.

Shares of Procter & Gamble plunged to $39.37 from around $60. The New York Stock Exchange said each stock has its own circuit breaker level. When these stocks fall below their levels, then they can be traded on any other exchange or platform at any price. When P&G fell below its circuit breaker, a bid came in for the stock at $39.37 from the Nasdaq, the NYSE said.

"You don't see a blue-chip stock like this go down 20 points with no news, said Frank Ingarra, co-portfolio manager at Hennessy Funds, a quantitative firm that deals with program traders. "All of the algorithms kicked in from this errant thing." I might add - 20 points in 2 minutes

Traders also also noticed errant trades among exchange-traded funds, including the iShares Russell 1000 Value Index Fund (IWD), which dropped from close to $60.00 to 7.5 cents.

"These ETFs traded to lows that are not mathematically correct," he said.

I don't think anybody knows what caused this just yet and if they do they are not saying and if they find out we will probably not get the truth. Next I am going to show you some 5 minute charts on what happened and it will become obvious that this was just computers.

Which many of you will remember I was very critical of the computer program trading in the crash of 2008 and said we would see more problems, a stop has to be put to this, we need real people making investment decisions, and for more that just a few reasons. These computers scammed billions of $$ today from real people, probably many small investors.

Computer programs are doing flash trading at fractions between bid and ask prices, it is good for liquidity they say. Program trading is skimming pennies between bid and ask spreads when they are too wide. They are used for arbitrage trades between different exchanges to grab the pennies on any discrepancy and currency fluctuation. Computer programs are used to sell stocks to not push the price down and in other cases to cap prices and push prices
down. And to buy too without pushing prices up

But they all have one thing in common, they are skimming billions out of the market and that is why Wall Street will fight tooth and nail for them. Probably over half the volume on the exchanges is not real, it is just trades between two different computers working off a program

S&P 500

DAW Jones IA

The Nasdaq Composite Index has the exact same chart pattern

If real people/investors were making this market. All three indexes would not be identical. What really happened is computer programs went berserk or as a fella commented above "algorithms kicked in from this errant thing"

What you see when you look at these index charts, over a course of 6 or 7 minutes, the computers just started selling everything into the so called black hole with no computers buying. The 2 big down red lines, that are set a 5 minute intervals. I doubt the 2nd 5 minute interval completed before the circuit breakers kicked in, or somebody pulled the plug - "Hey something is going wrong here" Hit Crl-Alt-Delete, we need a reset.

So on the chart you next see the 3 side way lines while things reset over 15 minutes. And after that is was well 'Sorry about that' - Ah everything is now OK we reset things back up to where they should have been. That is why you see the indexes gap back up as soon as the plug was pushed back in and the computers reset.

While this looks kind of harmless on an index, just a brief hick up - just hold on a minute. These indexes are made up of hundreds of stocks that were being traded during that erroneous 5 to 10 minute crash. And ETFs that investors trade based on the indexes. Lets look at just two stocks of the several hundred

First is the SPY - Spyder that mimic the S&P 500

We can see that about 25 million shares traded on the 1st 5 minute computer initiated blunder and another 10 million before the plug was pulled and reset back up, at an average of $110 per share that is about $3.8 billion in trades on just one stock or ETF. A lot of investors lost money they should not have and on the other side of the trade a lot of investors made money they should not have! I wonder who was on each side - What I know for certain, I could not check a price of a stock and enter the trade on my computer fast enough before the stock moved big time

Imagine the number of investors ripped off with their stop loss orders. What if you bought SPY at $114 and set a stop/loss at $112. This market plunged and gaped down so fast, you might have got stopped out at $110 or $109 only to see the market gap back to 112 on the reset. Can you say Rip off!

And this was going on in hundreds of stocks and many others for much bigger losses. Since there were rumors flying on Procter and Gamble, lets look at the chart

It looks like only about 300,000 shares traded there before the reset button was pushed. But at an average of $54 that is about $16 million in trades. Given about a $15 plunge, who got fleeced for $1 or $2 million just on this one stock. I could pull up hundreds of charts here.

Cisco, 10 million shares traded under these bizarre conditions

Hundreds of other stocks, you get the picture.

No doubt ordinary and many small investors were fleeced out of billions of $ Thursday by computer program trading gone berserk. Maybe it was not actual stock you traded, but your mutual fund was ripped off, so was your company pension plan. Who knows what their computer programs did?

There has to be a stop put to this. American's reading this newsletter, stop taking this crap, call your Congressman. If these guys do not do something soon there has to be linch mobs and hang them! The corruption on Wall Street and their computer programs are destroying the capital markets in North America.

There needs to be a class action law suit initiated against the owners and/or users of these computer based trading programs that just ripped off $billions from ordinary
people.

Lawyers need to take action!

And Canadians, we cannot sit by idly neither, we got fleeced even more in some aspects. Our markets trade in sympathy to the US and unfortunate we did not have the circuit breaker that stopped the trading, so we were fleeced for an extra 15 minutes. Check out this chart of the TSX index

The TSX never stopped trading, but you see the big drop at the same time over a 20 to 25 minute interval. 365 million shares traded on the TSX yesterday and I bet at least 50 million traded at the rip off levels

Oh but sorry, we did hit the rest button, Too bad about your luck!!!

This is another good example why you do not want to use stop/loss orders, but the mental stop loss as I suggest. Many traders were ripped off today by the computers with their normal stop/loss orders.

And a prime example why you should not trade stocks, Invest for the medium or long term and use diversification. You do not have a chance trading against the Wall Street computers, you have about the same chance as bringing a pea shooter to a gun fight!

So what did yesterday's action really mean?

If you look at the charts and prices, all my targets I predicted yesterday were all full filled within an hour. The S&P actually went below 1100 (1070) that I was calling for. Gold shot up to $1208 a big gain on the day and nearing the $1220 level I said we would test next.

The first thing I would say is this was not a real market nor a real test for the S&P 500 to 1100.In real trading it went as low as 1120 which is close enough, but I am expecting we could see more weakness, maybe today as investors will be afraid to be long over the weekend, maybe not - with employment numbers coming out the markets might be manipulated higher?

That being said, the masses - even the fund managers and program traders, main stream media and talking heads will probably actually believe what happened as being real. They may be fooled into thinking that was a real selling climax or market capitulation. Time will tell over the next few days when we see and read about the reaction of the main stream.

Now there is a couple of other important observations.

In the panic, the US$ jumped in value, bond prices moved up (yields dropped) we seen the normal knee jerk reactions and we can expect these things to happen in the big downturn later in the summer or this fall.

Also oil plunged yesterday, copper has sank from $3.60 to $3.00 in this market correction. Commodities have come down in this correction so I think we can count on this in the big down turn, because basically it will be another deflation wave

OLD CRB Index

Gold and Gold Stocks

The real shocker was the counter trend move in Gold and Gold stocks. The past pattern has seen gold stocks go down with the market and quite often gold as well or any rally in gold is weak or mute when the general market is selling off, but yesterday was much different and is something I have been waiting to see for a long time. Gold was up about $35 and the gold stocks seen good gains with the HUI up 7 points and even our juniors, probably half of them
or better seen gains

Here is a few comments from yesterdays newsletter that played out in spades
""I think gold could hold up very well in this next down wave, and might even go higher. The gold stocks could be questionable as the bear returns and commodities will probably head down too when the big down move gets underway.""

""Gold is showing relative strength so it might even test the $1220 before the general markets rally!""

""Gold may not weaken with a rising dollar this time because........""

I am unable to cut in and past the java chart of the daily move in the gold price on Comex. And I am not going to spend timing finding one right now, I may include it when I put this on the web site if I find a good one, anyway

Gold was heading higher all day and just before the computers went berserk after 2:30, gold had been trading between $1194 and $1198 from about noon hour and at 2:00 it hit $1200. Once the computer sell programs went 'a wall' gold was sold down to $1190, stopped there and in the next half hour quickly went back up to about $1207, by 3PM it was 1208 and hit $1210 shortly after 3PM and then drifted downward with the market in the next hour to about $1205.

Another very important point in case you do not see this yet!

I also looked at the 5 minute chart of the Gold ETF 'GLD' it did not seem to relate that well with how gold traded and most important it stopped trading and was reset along with the rest of the market. This is very important because you must realize in a real bad market meltdown or event where markets are halted for hours, maybe days or numerous sporadic circuit breaker halts, if you are using the Gold ETF as a hedge and not real gold, you may not even be able to trade at the exact times you need to most. And when the biggest profit opportunities arise.

This is true of all ETFs used as a hedge, you need to realize that this is a real and very important risk factor. Markets could be halted and the authorities change the rules before they come back to trade. These kind of events will become not so uncommon as this crisis evolves over the next few years.

Do not use leverage or margin neither, keep healthy cash balances in your accounts

Another important factor

We can cheer and be pleased that gold finally filled its role with a counter trend move, but was this only because the computers failed. The very computer programs that quite likely could have been selling gold with everything else.

That is a serious consideration because gold first started to trade down when computer selling first kicked in

And right on cue this morning, just what markets need - a very bullish jobs number - Ya right! The US economy added 290,000 jobs in April, which was much better than expected despite temporary hiring for the 2010 U.S. Census. Excluding Census workers, it was 224,000 jobs. I would be willing to bet before I start digging - this is a questionable number

And this morning evidence of a computer failure - Many trades were canceled on hundreds of stocks, but I did not see PG or SPY on the list I mentioned above

The Nasdaq OMX Group (NDAQ) said there's no indication at this time that a market participant experienced a technological failure prompting Thursday's wild market gyrations. Nasdaq OMX set out a list of which trades were canceled from Thursday's volatile session. The list of trades can be found at: http://media.primezone.com/cache/6948/file/8212.pdf

So if there was no technological failure, why are they canceling all these trades??? Or is it because all participants experienced a failure?

Most everything is down this morning including gold off about $8. Most investors and fund managers will be afraid to buy on a Friday and be long over the weekend. So a down day today is no surprise. Next's weeks trading will be crucial for our short term targets

(c) Copyright 2010, Struther's Resource Stock Report.

All forecasts and recommendations are based on opinion. Markets change direction with consensus beliefs, which may change at any time and without notice. The author/publisher of this publication has taken every precaution to provide the most accurate information possible. The information & data were obtained from sources believed to be reliable, but because the information & data source are beyond the author's control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Because of the ever-changing nature of information & statistics the author/publisher strongly encourages the reader to communicate directly with the company and/or with their personal investment adviser to obtain up to date information. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial adviser & is not acting as such in this publication. Struther's Resource Stock Report is not a registered financial advisory. Investors are advised to obtain the advice of a qualified financial & investment adviser before entering any financial transaction.