One week ago, when we first previewed this week’s infamous $60 billion pension fund rebalancing out of equities and into bonds which resulted in historic market gyrations, and a violent snapback in the S&P from what was shaping up to be the worst December on record for stocks, we warned that while the buying would “finally be some good news for the bulls” however “the problem is that the sudden deluge of last minute buying may simply be too much for the market to handle, as liquidity has collapsed to the lowest level on record“ and as a result “investors and traders looking for a desperately needed respite from market gyrations may have to deal with yet one more “seismic bout” of volatility.“

That’s precisely what happened, and while many are still trying to understand the cause behind last week’s market violence which prompted comparisons to watching the cult classic Pulp Fiction, where chaos is the only constant, the bigger problem that has emerged is a far greater one: how does one trade in a market in which, as we showed last week, liquidity has dropped to the lowest on record?

Practically speaking, the problem is simple as Bertran de la Lastra, CIO at Bestinver Gestion summarized: “If you go into the large caps and you try to do a significant trade – let’s say in a big fund company of $200 billion you’re trying to do a $50 million clip, a $100 million clip – you should be able to do it fairly quickly.” However, “the reality is that you may have to be working on it for a few days.”

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