What better equity to be short than Knight Capital Group, Inc. (NITE)?

The stock promotion scam is as old as the hills. It was just pulled off again in NITE. I wrote of it here.

Art is trading and trading is art and NITE is Trader Art.

Trader Art - NITE

Meanwhile, back at the studio, there are several recording and motion picture projects in the works. All of my projects are fueled by trading profits, so let’s get to today’s scores.

The downward trend that has been in place this week continued today. The S&P 500 closed down 1.95% or 20.78 points at 1042.63. The Dow Jones Industrial Index closed off 1.21%, and the Nasdaq composite was off by 2.67%. In small cap land, the Russell 2000 was down 3.51%.

S&P 500 - Daily

Before the open this morning, Goldman Sachs lowered their preliminary Q3 GDP estimates to 2.7%. The consensus is for growth of 3.0%. The number will be announced tomorrow at 8:30 AM EST.

In my September 29th post, GDP, GDP and a Triple, I mentioned that if analysts have to lower their Q3 and Q4 GDP estimates, trouble will ensue. As you can see by the breakdown in the various indices, trouble is ensuing: Q3 GDP will be less than expected and Q4 GDP numbers will need to be ratcheted down significantly. Now that the movie theatre of the market is jam packed, it is not out of the realm of possibility that Q4 GDP will come in flat, or 0%–no growth. For this and many other reasons, I am positioned for the risk aversion trade–short various stocks and indices while long Treasuries. When the market realizes that GDP will be lower than what equities are priced for, the disconnect will cause a panic. Everyone cannot exit the theatre at once. The exits will be jammed.

The dollar found support at the 75 level and has rallied. As stated numerous times on these pages, a rally in the dollar will have vast ramifications for all other asset classes. If you’d rather not be short the S&P, you can be long the US Dollar Index. Whatever way you play it, the gains ahead will be magnanimous if you are positioned correctly. The fundamentals can only remain disconnected from the technicals for so long. The tipping point looms.

US Dollar Index - Daily Chart

The Volatility Index (VIX) has seen it’s largest percent gain since the March bottom–up +/- 35% from the lows of October 21. When the exits of the market become jammed, the VIX will trade higher.

Volatility Index (VIX) - Daily

The rally from the March lows has stretched the market to unsustainable levels. I continue to position myself to profit from the risk aversion trade, which is upon us. As my trading profits persist, my mission continues to permeate.

All the while, the beat goes on.

Mission

Meanwhile, back at the office, Anything Anywhere! and I are going to see Paranormal Activity later. Before that, we are discussing the tape. Friday was significant, and the biggest gains of the year are in front of us, not behind us. Anything Anywhere!, who is in the delivery business, is jumping up an down about the breakdown in the railroads (BNI, UNP, CSX). There is so much to talk about, I’ll start with the broader averages.

The S&P 500 closed down 13.31 points or 1.22% at 1079.60. The Dow Jones Industrial Average closed at 9972.18, down 109.13 or 1.08%. The Nasdaq Composite was only down about half as much. It closed at 2154.47, down .50%. The fall in the Nasdaq was softened by strength in names such as Micrososft (MSFT), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Bidu (BIDU), and T Rowe Price (TROW).

While equities were weak, the dollar showed signs of support. The US Dollar Index closed higher by .50%. In my prior post, I mentioned the importance of the $75 level in the USD Index. That was two weeks ago, and we continue to hold the line.

US Dollar Index - Weekly

Trading Lesson

Since I anticipate a breakdown in equity prices–and strength in the dollar–I look to be short weakness, not strength. In other words, I’d never be short Amazon (AMZN), or Google (GOOG) here. Rather, I’d look to go short Northern Trust (NTRS) or Knight Trading (NITE). Trading lesson: If you are bullish, buy strength; if you are bearish, short weakness. Write that down.

Dark Pools

Of late, there has been limited media attention to dark pools. Dark pools are off exchange platforms run by large banks (Goldman et al). Dark pools allow traders to remain anonymous, in order to disguise their trading strategies. Important speculation regarding dark pools is currently circulating—if certain proposals are passed, trading rules will alter. And when the rules of a game are changed, it is prudent to be cautious.

The proposal in place seeks to cut the trading limits in a dark pool. Currently, if trading through a dark pool, you are allowed to trade 5% of a company’s daily volume. The proposal–which will be put into effect imminently–will restrict the amount of shares you can trade from 5% of a company’s daily volume down to .25%. You can trade 95% less shares now. By cutting the amount of shares you can trade, regulators are effectively shutting down dark pools.

Knight Trading (NITE) is, through all intents and purposes, a dark pool. It is my opinion that NITE will trade below $1 in the near future. There are plenty of fundamental data points which indicate trouble. Also noteworthy is the tremendous promotion scam which was just recently perpetrated.

It all kicked off in March, when someone figured out that something was wrong with NITE–perhaps it’s business was going away. In order to sell a huge position, someone floated a rumor: NITE was to be taken over by a large online brokerage firm based in San Francisco, CA. These rumors bring in suckers, and allow smart money to position.

On Wednesday August 19th Pali Research raised NITE from hold to buy.

On September 16th, NITE was mentioned positively on CNBC program Mad Money.

On October 9th, takeover chatter made the rounds again—more hitting the bid by insiders.

Now, smart players have sold their positions in NITE and gone short. The setup is complete. If dark pools are shut down, liquidity will be hindered. The ramifications of this will be more significant than what the market is priced for. Coming back full circle, I own put options in NITE. Someone knows something, and I am happy to follow their tracks.

Knight Capital Group - NITE

Gold

Gold has traded in a range over the past two weeks. Gold and precious metals remain vulnerable to a sudden rally in the dollar. I continue to view the metals from the sidelines.

Gold Futures - Daily

Looming Catalyst

Living up to it’s name, the stock market is currently a true market of stocks. There are plenty of names that are showing strength–AMZN, TROW, and MSFT to name three. In my view, we are witnessing one of the greatest liquidity driven rallies of all time. Investors are bought in. The movie theatre of the market is jam packed, standing room only. The lights just went down. At some point, someone is going to stand up and yell fire. A catalyst that will cause a rush to the exits. Everyone can’t get out at once.

As all of this unfolds, fortunes will be made and lost. All the while, the beat goes on.

Bob Pisani interviews Art Cashin.