T2W Bot

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A look a the current market correction – the ‘canary correction’ and what may have caused it.
When the Morgan Stanley Emerging Markets Index Exchange Traded Fund (EEM) hit an all-time high of $111.10 on May 9, 2006, it marked a meteoric rise from its humble launch price of $33.37 a little more than three years before. Volume had also grown exponentially from a mere 36,300 shares on April 11, 2003, to an average daily exchange of more than 3.5 million shares by early May 2006.
caption: Figure 1 ? The Morgan Stanley MSCI Emerging Market ETF (EEM) dropped sharply between May 9 and June 13, 2006. May registered the biggest monthly decline in the history of the index, and the drop was only half over. Chart provided by www.Genesisft.com.
caption: Figure 2 ? This daily chart illustrates the fall in the...
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Well written, provides a very approachable analysis of complex issues that even a numpty like me can follow.


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Interesting article.

However, not sure about the part on derivatives.
The article refers to "value" of these derivatives but it is not clear to me
exactly what this is. However, I suspect it is value of the underlying based on volume traded. If this is the case the exponential growth does not represent large capital movements as suggested but is mostly due to the rapid increase in high frequency algo trading.

Seen lots of "derivatives will end the world" stories but most of it is BS in my opinion.
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I have two concerns about derivatives.
1) The speed at which funds have flowed into them in the last few years. Normally this rate of inflow has been followed by a major correction in other markets that have experienced this rapid an increase.
2) The rate of change of inflows is now declining and this has been associated with corrections or at least emerging market meltdowns in the past. I don't believe that derivates will end the world. They are here to stay. But as they are relatively new and have experienced irrational exhuberance of late, gives me reason for concern, especially given excesses in other asset classes. Matt Blackman
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