Last week saw more irrational rallies in financials, which someone coined the Orgasm of Subprime Past.  It was an unusual week…nearly every analyst came out on CNBC and said financials rallied too hard too fast.  Every technical indicator is showing them beyond overbought, right at the 50 day moving average resistance and so forth.  But does any of that matter?  They were all ripping all week, celebrating the 8 billion dollar loss from Wachovia. No humans actually believe that the financial crisis is over, no humans believe that anything has really changed since last week.

There are no signs of home prices going up, there are no signs of job growth, there are no signs government deficits falling and for good measure the dollar didn’t even spike all that much against major currencies.  And there was no real reason for oil to drop 20% in a week, people didn’t die in mass, war in Iraq and problems with Iran didn’t end. 

Welcome to the era of Quant Trading.

The problem with the markets these days is the proliferation of quant funds, which uses highly leveraged funds to trade the market in one simple direction.

It’s no secret that energy and financials trade against each other…which by the way historically doesn’t have much correlation at all.  Financial stocks were all ripping until 2006 and so were energy stocks.

So these funds will put billions of dollars to work using incredible leverage with a simple trade.  Short Financials, Short Airlines, Long Energy, Long Ag….and off it goes in both directions which was the case in June and Early July.  Then comes the feds stopping  the short financials trade.  So what do they do?  Flip the trade…Short Energy, Short Ag, Long Financials and Long Energy and off she goes even quicker, forcing margin calls, busting through hedges.

Bank of America added some 70 billion dollars of market cap within a matter of 5 days.  United Airlines went from 30 to 3 in 2 mos, only to rally to 9 in 3 days.  It took 4 months for Chesapeake Energy to go from 45 to 75…it went down in 2 weeks.  Understand that these are behemoth companies that are being toyed with like they are penny stocks.

The little guys profits have been wiped out on both sides of the aisle while these quants go full blast taking everyone’s money.  This market has had a monster run…but have my mutual funds even gone up?  No, because they own very little financials.

I have been trading for 8 years and I know people trading for 20 years.  Nobody has seen anything close to what we are seeing now.  Yes I remember the dot com bubble…you didn’t see stocks diverge against each other so severely.  You had stocks that kept going up for years and then crashed and burned over months.  These companies were never profitable to begin with, so it was just a classic bubble.  You never had a 170 billion dollar company become a 100 billion dollar company only to become a 180 billion dollar company…all in 1 week like you do now.

Each so called “sector rotation” becomes more drastic.  Yes I know 20 cents options have become $10 in a few days.  Those on the right side are making incredible money.  But let’s think about the investors out there…how in the world can you go from “financials are toast, invest in commodities” then to “commodities are toast, financials are the growth story” and then in a few days once again “financials are toast, invest in commodities”.

If the SEC had any brains…they would stop all naked short selling and bring back the uptick rule.  That would prevent these incredible short covering rallies along with the equally incredible bear raids that just keeps repeating itself over and over.  The Federal Reserve can increase Reg T which will make things more difficult for leveraged traders both long and short.  Congress can pass legislation to restrict the leverage that speculators have.

Stocks moving 30% after earnings one way or another seems to be an everyday occurence now…but it never used to be.  Again the leveraged shorting and short covering is wreaking havoc out there.  Sweetheart of the Tech Rodeo Apple Computers went down $14 one day on a phenomenal quarter and great guidance, only to recover all but $4 of the initial drop and then went up another $4.  We are back to exactly where the stock was before earnings.  What kind of nonsense is that?

Let people short, Let people go long, Let people invest, Let people trade…but the game is not fair with these massive quant funds who can toy the markets and behemoth blue chip stocks like a rigged casino using leverage and power that nobody else can compete against. Stop the insanity!