Did you fall out of bed on Wednesday night?
You wouldn’t be the only one. The US bond market did the same.
First, the swings on global markets were dramatic. Now, they’re becoming farcical.
Investors are scared. And the volatility I warned you about last week is getting wilder by the day.
That’s great news for one set of players on the financial stage.
Free Reports:
I’m not talking about bulls or bears. I’m talking about the mainstream financial press.
They lap this stuff up. For the mainstream media, volatile markets bring more newspaper sales to desperate investors.
The self-anointed finance gurus can try to obscure the real reasons why stocks move. They might even scare you into selling your investments.
But if you get sucked into that, you could miss some of the most explosive potential profits of your life.
In case you slept through it, Wednesday brought on a night of high drama on Wall Street.
US 10-year government bond yields dropped like a stone. The benchmark cratered from a high of 2.17% to a low of 1.86% in just over 60 minutes.
That might not sound like a big move. But it was the second-largest daily drop in 10-year US Treasury yields since 1989.
In the market for US government bonds, a one-hour, 31 basis point shift is deeply unsettling.
The chart below shows the wild scene in the bond market — and how it ruffled stock investors’ feathers.
The catalyst for the sharp move seemed to be — blandly — the clutch of monthly US economic datapoints that came in weaker than investors had hoped.
As you can see above, the bonds recovered their yield over the day to close largely unchanged. But the size of the swing will stick in traders’ stomachs.
Think about how you might feel if your bank phoned to tell you it’s cutting your home loan rate by 0.31%…then called back later in the day to eat its words.
I’ll admit that’s not a precise comparison.
But magnify it to the scale of the US government’s $17.8 trillion national debt.
That shows you the impact of seemingly small moves in the bond markets.
The mainstream press has leapt at the opportunity to proclaim this move a ‘flash crash’.
These guys never let the facts get in the way of a good headline.
For starters, this move was more melt-up than meltdown. That’s because, as most investors understand, bond yields and bond prices move in opposite directions.
So this price action actually bid bond prices up in a hurry…as opposed to the real flash crash that shot down US shares on Thursday 6 May 2010.
I was on the US stock trading floor in London that day four years ago.
Let me tell you, this week’s price action has nothing on the confusion that swept those fragile markets.
Only one factor links these events. It’s the spectre of high-frequency (HF) trading.
I’ve written to you before about HF trading and the speed demons who engage in it. Most market players still believe these traders caused the flash crash.
We know these scalpers play in the bond market. A study by Washington State University last year found that HF traders cause volatile moves in US Treasury bond yields.
So it’s distinctly possible that they deserve some of the blame for this week’s fiasco.
The way I see it, these crazy moves will become a permanent feature of the financial markets.
As more trading automates, vicious price swings will happen more and more often.
That will impact your wealth…but only if you let it. The dumbest move would be to panic in a flash crash and sell at the bottom.
Don’t despair. I’ve found a simple way to ease your fears of volatile market moves.
And as I mentioned earlier, this could bring you some of the biggest profits of your life.
HF traders love to push around heavily traded blue chip stocks. These are the companies whose names you hear on the evening news.
So here’s your solution — avoid the stocks and bonds that these guys target.
Any investor who’s willing to take a speculative punt in seeking a real return on their money should allocate part of their portfolio to emerging companies — the type that fly under the radar.
And you can find some of today’s most exciting Aussie stocks in the oil sector.
HF traders shy away from these small, speculative energy firms. That’s because their shares only trade in enough volume to let private investors like you and me take positions.
With the scalpers locked out, this opportunity is yours for the taking.
Oil explorers are starting to hit paydirt in untapped regions from Asia to Africa.
And right now, Aussie oilmen are about to tap the last major oil frontier of our time.
One of these teams is taking on a field said to contain up to 380 million barrels of oil.
It doesn’t matter whether the crude oil price goes up, down or sideways…if these explorers strike black gold, their shares could go ballistic.
But don’t take it from me. Take it from my pal Jason Stevenson.
Jason analyses resource stocks for readers of his newsletter, Diggers & Drillers.
I’ve never seen him as excited as he is right now about this select group of oil stocks.
Talking about one of these companies, Jason told me, ‘The potential gains from this opportunity alone could hand you your yearly salary in a single shot.’
If you’re an avid Money Morning reader, you’ll know this is possible.
You’ll know about the 265% profit that African oil explorer FAR Ltd [ASX:FAR] has brought my Australian Small-Cap Investigator subscribers in the past two months.
Well, the stocks Jason has picked could totally eclipse that gain.
If Jason’s right about the opportunities that these frontier oil explorers can grasp…they could bring you gains that will make Wednesday night’s ‘melt-up’ seem like a rounding error.
To find out more, check out today’s second article in Money Morning…and Jason will show you how to get involved.
Cheers,
Tim Dohrmann+
Editor, Money Morning
The post How You Can Profit from the Fake ‘Flash Crash’… appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
