Market Overview

Who Let The Bears Out In 2015?

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The declines from the last trading session of 2014 carried over into the first session of 2015. After a promising opening, which had the major indices firmly in the green, the boards quickly ran red.

Below is a possible reason for the sell off that was kickstarted by huge sell orders on December 31's open and close.

Year-End Profit Taking

The declines from the year-end session do not seem that out of the ordinary. After the last few months of heightened volatility, many investors that waited until the final day of the year to cash out were doing so close to all-time highs in the market.

The “selling” theme was evident on December 31's opening by the preponderance of sell imbalances that were released at 8:30 a.m.

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What Are Opening And Closing Imbalances?

Investopedia describes imbalances as situations “when too many orders of a particular type - either buy, sell or limit for listed securities and not enough of the other, matching orders are recovered by an exchange."

On many occasions, the imbalances are offset by other market participants that are looking to take the opposite side of the imbalance -- thus, allowing an opening on a mutually agreeable price that may cause an issue to open in the vicinity of its previous day's closing price.

When the imbalances are not fully offset, shorter-term traders will attempt to profit from the order imbalance by going long on an issue at a depressed price or shorting it at an inflated price. Often the trades results in “quick scalp” in the first few minutes of trading.

On other hand, when a large imbalance is not offset by another large investor and shorter-term traders absorb the order flow and there is not immediate gratification, they will quickly exit their losing trades and exacerbate the move of the initial imbalance. Once that takes place, it is hard for an issue to reverse the initial surges and therefore may determine the trend for the remainder of that day.

Sellers Everywhere

This appears to be what took place in the year-end session. After the a.m. sell imbalances sent the market heading south, the p.m. imbalances indicated more of the same. The closing imbalances, which are released on the trading floor at 2:00 p.m. and available for public dissemination at 3:45 p.m., revealed many more sellers than buyers.

As a result, traders sold the market off across the board, correctly anticipating the sellers on the close hitting their discounted bids to cover their profitable trades.

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Future Implications

Of course, the order flow from large market participants on December 31 that carried over into the New Year's first session on a lesser scale may not be determinate of the markets direction in 2015. However, it should not be ignored.

For more detailed information on how large market participants are approaching the open of the market each and every morning, tune into Benzinga's #PreMarket Prep morning broadcast as Joel Elconin and Dennis Dick analyze the short- and long-term implications of the opening imbalances.

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