There’s an old saying on the floor: “The trend is your friend.” Anyone who has ever been successful trading in the markets will tell you that trends do exist, and anyone not in tune with the trend, whether to follow or be a contrarian, is a fool. The late 1990s taught many people that there just might be something to market timing. This period saw an explosion of derivatives products such as the ETFs and other investment vehicles that made entering and exiting positions very easy.
One of the best examples of the randomness of events dictating the flow of the market was at the inception of the first Gulf war. As Saddam Hussein amassed his forces along the Kuwaiti border, the markets were looking ahead to the unemployment number that was to be released later, along with any data that would show the economy coming out of recession.
As I talked with the traders and portfolio managers available to me, no one seemed to care about what was happening in the Persian Gulf and they thought any aggressive moves by Iraq would be immediately stopped by the threat of U.S. intervention. History taught us that Iraq miscalculated the way the United States would respond and opened the door for decades of problems in the region. As the U.S. State Department negotiated with Iraqi diplomats, there was one trader from First Boston, Andy Elner, who suggested to me that this was a larger problem than originally thought. In hindsight, he was the only one who saw the storm coming.
In the days before the electronic marketplace, the pit used to explode with activity anytime there was a news item or event that would affect price action. Something big like a surprise move by the Federal Reserve would generate hours of frantic trading, with volume nearing capacity in the open outcry session. But since the creation of the S&P contract, no one had experienced the United States at war. More important, how would the market react to the country in a state of war? As the deadline for the Iraqis approached, everyone became a political science expert.
The talk across the floor was of the possibility of war and the ancillary implications for the entire market. I talked with many of the traders I was covering from First Boston and other institutions about the direction the market would take in the event of war. I painted different scenarios, from a long drawn-out campaign to a short in-and-out strategy. Without exception, everyone was convinced that the equity markets would decline significantly and the run into short-term Treasuries was assured. In other words, they were putting on the “economy deterioration spread.”
One morning a press conference was announced with Jim Baker, sec- retary of state under President George H.W. Bush, in which he would talk about the ongoing dialogue with the Iraqi delegation. In a scene reminiscent of the movie Trading Places, in which everyone stops trading to listen to the crop report, the entire S&P futures market was silent, waiting for the headline or a hint of what was being said. At this time on the floor TVs were not allowed, nor were they part of the exchange landscape (a situation that has since changed now that large TV monitors have been placed on every corner of the exchange floor).
A local in the pit would look for what was referred to as the “leak” from a desk that would give them an idea of what was said and how the flow would trade off the information. As Baker approached the microphone, the order flow around the pit ground to a halt. Every trader off the floor within range of a TV set was watching carefully to get a clue about what was going to be done next. Being on the telephone myself, I asked the traders to turn up the volume so I could hear what the rest of the world was being told. Baker talked about the frustrating dialogue between the international community and the Iraqi government, then he mentioned Kuwait. Prior to the press
conference, the understanding had been that the international community led by the United States had given Iraq an ultimatum to leave Kuwait (which they had recently invaded) or face the consequences.
Listening on the phone, I could hear Jim Baker talking, and then it happened: When Baker uttered the word “regrettably” in describing the Iraqi answer, the market erupted like a volcano! All I could hear on the phone from that moment on was “Sell me 100!” I had three traders yelling orders simultaneously. Sell! . . . Sell! . . . Sell! Unfortunately, there was not much bid when we tried to sell the futures—everyone had had the same idea. Finally, after a 10-point drop, the market found buyers and the orders were filled. The traders had put on the short position that they were convinced was a winner if the war started. The move in the S&P futures went from roughly 310 even down to 303. The market has never seen that level again. Not only was it the low of the move that day, it was also the low of the move for the rest of the decade.