How to manage difficult markets, during times of intense volatility and devastation.

We Americans are so spoiled, no matter how you dice it.  As I have been pounding my desk and yelling "unmentionables" at my screens over the past 4 trading sessions, the people of Japan have been reeling and facing trials that my family and I could not imagine.  I pray for the people of Japan.

While Japan has garnered most of the focus of the financial markets, the debt crisis in Europe is still charging forward with fresh downgrades of Portuguese debt and the Middle East (Bahrain) is still boiling over as videos of government soldiers killing and beating protesters have gone viral.

The following is a list of the major Futures Indexes I watch and their percentage changes since the close on March 10th. (Values taken at 03/17/2011, 3:30am CST)
ES (June) -1.86%
Dow (June) -2.18%
FTSE (March) -3.28%
EuroStoxx 50 (March) -4.83%
CAC (March) -5.41%
Dax (March) -6.11%
NKD (March) -14.07%

My initial reaction to the news on Friday was to sell ES (S&P 500) and buy Dax, knowing that there was some real inherent risk, but the volatility would be good and provide some back and forth.  I looked for the greatest differential or spread to the S&P, as my initial analysis.  I could not have been more wrong, in the short-term.  In typical fashion, the spread rallied in my face, with no relief to move some inventory.  I managed the trade well, initiated a max of 4 units, and ended the day with 3 units and a scratch P&L after financing my new core position with scalps throughout the day.  The following chart is basis point differential of the ES over the Dax, using the close of March 10th as the benchmark.

I still believe this is a gross overreaction in the German Dax index, not to minimize the devastation experienced by the Japanese people.  I covered all but 2 units during the European session on Wednesday and then had to make a decision.  As news surfaced that the Japanese were having difficulty cooling Reactors at Fukushima, the markets came under intense pressure and never looked back.  At the time, I wrestled with the idea of covering the entire position and taking the profit I had in the trade.  I held on and handcuffed myself for the US session.  Hindsight is 20/20, but that is what we deal with as traders.  Major decisions need to be made, with accuracy, in a minimal amount of time, time being measured in seconds.  Wednesdays US session gave us many opportunities to scalp and finance this position as we wait for the core position to revert back to the +200/+100 bps level.

Stay tuned.......Be Blessed

Hemi