Be wary of synthetic markets

Implications: The analysis in this article is generally on point, but keep in mind this is a synthetic market.

Analysis: Indices such as the LevX facilitate through synthetic markets a method to express an opinion of an underlying cash market without actually participating in the market. 

By way of comparison, the introduction of the ABX indices made it possible for market participants to take a position (express a view) with respect to the housing markets without actually buying the underlying mortgage-backed bonds.  At the end of 2005, this synthetic market dwarfed the size of the cash market at four times its size.  In this case, the sentiment on housing in general was so negative that the extensive selling drove prices so low that the cash market for new issue mortgage bonds stalled, facilitating the current credit market demise.  (Why would you buy a new issue mortgage-backed bond at a higher price than the synthetic substitute?)

The analysis that the LevX index is down due to Lehman's woes is generally on point, but keep in mind that traders of this index, and any index, can be trading in an opportunisic manner that can overstate the weakness or strength of the underlying cash market equivalents.