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Programmed Trading?

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October 09, 2008 – Comments (7) | RELATED TICKERS: GM , AIBYY , CX

GM share prices plummeted 17% today. There are 560mil shares of GM stock outstanding. In the space of 15min 2mil shares changed hands, and the price broke below $7.00. Below $7, 3mil shares were stopped out and sold and the price fell below $6.50. Below $6.50 4mil were stopped out and the price fell below $6.00. The final 4mil sold out and at $5.50 the price bounced.

The percentage drops from the open were 3%, 10%, 14%, and 21%.

There was no news relevant to GM that wasn't known yesterday. 98% of shares did not trade so 2% of shares caused a 21% fall.

So where do you set your stops? Does your trading platform come with guidelines on where to set stops? Did the traders who were out at 3% get back in at down 20%? It seems there were some buyers below $6.00. (15mil shares) Was that sidelined money seeking value?

I have no clue, but it happened to Cemex yesterday. A 12% fall on less than 2% shares traded. And AIB.

Does it mean anything at all?

7 Comments – Post Your Own

#1) On October 09, 2008 at 12:21 PM, leohaas (32.65) wrote:

I am a bit puzzled about these drops myself. I do not know why GM and CX dropped so much on no news.

I cannot help you on the stop question (I typically do not use them). I hope someone will post a useful response on this issue!

You may think of 2% of the shares as a small percentage, but it is not. On a typical day less than half of a percent of the outstanding GM shares trade. So today is an exceptionally high volume trading day for GM. Big swings, both up and down, typically go together with high volume. From that perspective, this is just business as usual.

Final thought (and I hate to say this): GM is not a value play at any price. Long term it is a very risky play, quite the opposite of a value play.

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#2) On October 09, 2008 at 12:31 PM, russiangambit (29.42) wrote:

Usually, when hedgies go fishing for stops, they will try to hit support/ resistance levels and round numbers, like 6.0, 7.0 in this case. This is where most people have the stops.

If you have trading softare, you can program stops like 2ATRs, but not many people use it. Usually stops are just below major support.

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#3) On October 09, 2008 at 12:46 PM, ckfinance2003 (94.04) wrote:

Clearly most of the smart money is off the table or in for the long haul.  When I start to see the exchanges trading volumes back up then I'll worry about the direction it's going in.

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#4) On October 09, 2008 at 1:03 PM, Gemini846 (54.83) wrote:

I normally use protective stops at 20x the beta (in % from the opening or high close). I learned not to stop on round numbers. That way even if it gaps you are at least in line to be converted first.

GM has been very volatile and has a beta of 1.4 or so so if I bought in expecting a pop at like $8 I would stop out at a 28% loss $5.76. For an issue like GM; struggling fundamentally with a downward trend, 28% is way too much risk to take, but half of that 14% could result in not having a chance to make any money. Needless to say I would be very unlikely to buy this issue.

JNJ for instance has a beta of .39 or so. Since its a div payer in staple commodities it will not move as much. I rarely use stops on Div payers since I'm usually buying them for yield, but were I looking short term I would set a stop at 7.8% based on a $63 buy in $58.09. JNJ hasn't been that low since April 2006 which would mean a dip to that level indicates a serious broad based market collapse has occured and I need to be in cash.

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#5) On October 09, 2008 at 2:06 PM, sobodobo75 (66.79) wrote:

I'm not sure if this is the answer, but the SEC's emergency short sale ban on 800+ "financial" stocks ended last night.  Somehow GM finagled its way onto that list, so today is the first day the shorts have been able to get back in since Sept. 22. 

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#6) On October 09, 2008 at 2:50 PM, devoish (98.05) wrote:

Gemini that is an interesting idea for setting stops and certainly moves you away from the crowd. It also seems to make sense in that normal volatility won't get you stopped out at a loss.

Thanks everyone for the replys, but I guess it is just a sell-off.

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#7) On October 09, 2008 at 4:54 PM, chawkins88 (< 20) wrote:

From briefing.com:

"Dow component General Motors (GM 5.26, -1.65) has been placed on CreditWatch Negative at Standard & Poor's.  The placement reflects the weakening state of global automotive markets, along with capital market conditions that will remain a serious challenge.  GMAC, GM's 49% owned finance facility, was also put on CreditWatch Negative." 

I didn't see this until the end of the day... But it explains the -30%. Ouch. 

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