Is Forced Selling Fueling Bear Market?


They say what goes up must come down. Well, prepare for another squall to move the market. We’re talking about the hedge fund unwind.

As commodity prices surged to new highs earlier in the year hedge funds were only too eager to go along for the ride. In fact, taking a long position seemed like the only logical trade.

But as upheaval roiled the markets hedge funds found themselves forced to take profits anywhere they could. Trouble is, many only had winning bets in energy and agriculture – so they cashed out those trades in order to balance their losing bets in financials and real estate.

That’s sent commodity prices tumbling. And much like the ascent, this move lower has been fast and hard. Now with Lehman bankrupt and likely to unwind its holdings prices could slide even further.

"I think this is giving the bulls further reason to exit the market," said Stephen Schork, an oil analyst and trader in Villanova, Pa., who said the pullback could reflect selling by Lehman or possibly a hedge fund struggling to raise capital. "When you see price drops of this size, it reeks of someone being in trouble."

Is there a trade here?

I’m also seeing huge redemptions in hedge funds, adds Tim Seymour on Fast Money. I think we’re still in a nasty fray. Personally I’ve paired down my positions. I expect to see more redemptions through the end of September.

I think the way to play it is longSchlumberger or Baker Hughes , counsels Guy Adami. It feels like the hedge funds already blew out of these names and now their valuations look attractive.

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Trader disclosure: On Sept 16, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (MSFT), (WMT), (UUP): Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Finerman Owns (GS); Finerman's Firm Owns (DVN), (GE), (MSFT), (NOK), (SUN), (TSO), (VLO), (PM); Finerman's Firm Is Short (XLF), (IYR), (IJR), (MDY), (SPY), (IWM); Finerman's Firm Owns (DNA) Calls ; Najarian Owns (AAPL) And (AAPL) Collar; Najarian Owns (AIG) And Is Short (AIG) Calls; Najarian Owns (MS) And (MS) Put Spread And Is Short (MS) Calls; Najarian Owns (NOK) And Is Short (NOK) Calls; Najarian Owns (RIMM) Call Spread; Najarian Owns (TSO) Call Spread; Najarian Owns (WB) Put Spread; Najarian Owns (WM) And (WM) Puts; Najarian Owns (XLF) And (XLF) Collar; Seymour Owns (BX)

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