August 24th gap down (or mini crash) of 1,000 points on the Dow was incredibly important from another angle. It has exposed a weakness in ETF’s that not many were aware of. Still not aware of. An in depth discussion can be found here…..
Wild Trading Exposed Flaws in ETFs
For our purposes and since we follow the Dow so closely, let’s take a look at DIA (chart above). But keep in mind, the analysis below was evident throughout the stock market and across most financial instruments the morning of August 24th.
The Dow and DIA typically move together (+/- 20 cents). That morning the Dow bottomed 5 minutes into trading at 15,370, while the DIA bottomed at $150.57. That’s a 2% discrepancy or an arbitrage that can be recovered in a matter of minutes.We saw the same on QQQ/NDX and SPY/SPX, plus numerous other ETF’s.
Here is what I am thinking. Should the market crash over the next few months, something that is possible given today’s overvaluation/speculation environment, enterprising investors/traders might want to look at ETF’s to boost up their gains. On both the short side and subsequent reversals.
Who knows, the next discrepancy could be 2-5%, depending on the size and speed of the primary move. That is to say, put this arbitrage on your “To Watch List” and be ready to act if the market is crashing and/or moving fast.
