Posts Tagged ‘ultrashort’
Cramer tells why stocks go crazy during the last 30 minutes of trading
On yesterday’s Mad Money, Jim Cramer gave a brief account of the reason why stocks seem to exaggerate their moves up or down during the last 30 minutes of trading, as seen here, here, here, and here.
The culprits are not foreigners, but Ultra/Pro ETFs.
For those of you who don’t know, ETFs are Exchange Traded funds which hold are traded like stocks but actually hold a collection of stocks and/or bonds which mimic a sector of the market (ex. XLF is the FInancials ETF which goes up when the Financial sector of the NYSE goes up).
The Ultra ETFs are leveraged ETFs, with the ability to buy or sell 2 or 3 baskets of stocks for each share of their ETF. For example, if an investor buys SKF, the Ultrashort Financials ETF, the manager of that ETF sells 2 of the Dow Jones Financial Index.
So the reason behind the crazy moves at the end of the day is the buying and selling of these leveraged ETFs.
The example that Cramer gave was that if a portfolio manager buys a lot of the ProShares ETFs at 3pm, then the manager of the ProShares ETF has to go and sell short twice that amount of the index with a typical 30 minute delay. The end of the day rallies / drops are basically them squaring out their positions.
It is convenient that their selling / buying only exaggerates the direction the market was already moving that day allowing people who trade with the market to benefit from it, but it does create a very manipulated market environment which is hardly fair for everyone else.
Cramer is against these leveraged ETFs and thinks that Cox (chairman of the SEC) should be fired and rules to regulate this market manipulation should be re-instated and I agree with him. But until that time, the added volatility gives plenty of traders great opportunities to make money.
