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Erratic week leads to market imbalance
Mar '08
NY futures closed a very erratic week with relatively minor gains, as May was up 337 points to close at 82.70 cents and December advanced 433 points to close at 89.10 cents. Both of these closing values are based on 'synthetic futures', which are derived from the options market.

We probably have to go all the way back to the Civil War to find anything remotely close to this week's wild trading. It all started with a short-covering rally on Monday morning, when trade shorts decided to seek some protection against mounting margin calls, after the market had, at that point, already risen by about 10 cents since the middle of February.

However, as trade shorts quickly found out, it was not easy to buy out of positions because there were hardly any willing sellers around. Hedge and index funds, who own most of the longs, do not typically sell into a rising trend and there were very few able or willing short sellers left among the trade itself. This imbalance between buyers and sellers quickly brought the market limit up and then the panic started to set in, with May closing that day synthetically up 1204 points at 93.90 cents, which ultimately proved to be the highest close of the week.

With scores of shorts facing enormous margin calls on Monday night, some of which were unable to come up with the necessary cash, it was not surprising that the market spiked higher right out of the gate on Tuesday morning, as forced liquidation of non-compliant shortspropelled synthetic values as high as 106-107 cents in May. Once this latest round of panic-buying was out of the way, the market suddenly encountered a void of buying and fell precipitously by over 20 cents in short order to a daily low of 84.95 in May. At that level renewed buying came back into the market and we finished the session at 90.10 cents synthetically, which was still nearly 4 cents off the previous day's closing value. The futures market remained locked at limit up that day at 88.86 cents.

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