S&P shake & bake, S&P slip & slide, S&P flunk-a-dunk … call it what you like. Today was a great example of why the world is losing faith in the U.S. Don’t get me wrong, I love the United States, but why are we going through this? Did the Fed know at its last meeting that a government breakdown was coming and that’s why they backed off from the taper? And you know what? The risk of a default has actually declined over the last two days of selling off. How’s that work?
The Asian markets closed mostly higher and Europe is down slightly. Today’s economic calendar starts out with the MBA purchase applications and Chicago Fed President Charles Evans speaking on a panel discussing unconventional monetary policy in Washington. Yesterday complacency turned into real selling.
I saw on Twitter that CNBC is calling for 1620-1625 in the S&P. That’s great but about a week late. I am not sure where they have been, but when the VIX rockets up like it has been doing over the last few days, it’s a big signal of things to come—or is it? Yesterday we actually saw big institutional selling in the ESZ (S&P e-mini future). We don’t know if it was a spec trade or a hedge, but we did start seeing it yesterday.
Additionally, our desk had a busy day in the S&P options. Most of the trade we did was rolling lower. I am not saying that the S&P can’t keep going down, but when you see the options funds rolling lower and the hedge funds selling the ES this late into the cycle, you have to at least question if the selling is coming late to the party. And I really don’t care what Guy Adami has to say.
There is no doubt about the overall price action in the S&P. At one point near the highs of the day the premium levels between the ESZ and the S&P cash were at buy levels, but with all the natural cash sellers around, in came the bids for the sell programs. The new headlines and algos did the rest.
A friend sent this to me last night. Has the bus gotten too full again?
Washington – There have been some glimmers of hope:
1) White House floating the idea of a “short-term” ceiling hike idea (this started Monday morning and Obama reiterated the concept during Tuesday’s press conference.
2) Boehner saying he “just wants to talk.”
3) Boehner/Cantor backing off their prior ACA demands.
4) Obama directing his criticisms to Tea Party and not Boehner/Republicans in general.
5) Tone in the pressers backing away from the angry tone of recent weeks (this is the case w/all the major principals).
HOWEVER – while a path from the present morass exists, the fact of the matter
is that both sides are still very far apart and the posturing prob isn’t over (Boehner held a press conference Tuesday at 4:30pm ET and Jack Lew is testifying before the Senate on Thursday).
Our view is that at some point both parties will succumb to pressure and sit down and get a deal done. Is that today? I don’t think so, but as the week comes to a close I do think there will be some type of compromise. Yesterday the CBOE’s fear gauge added 4.8% to 20.34, the second highest close of the year.
The S&P has lost 34.4 handles in the last two days, its biggest loss since June 21, and fell 1.2% yesterday to the lowest it’s been since Sept. 6 and is now trading on a four-week low. The S&P is now down 4.1% since making its record high on Sept. 18. The futures have closed lower 11 out of the last 14 days or down 5 out of the last 8 sessions.
With that in mind and knowing the S&P has been down so much, we lean to buying weakness and selling the rally. While we do think there is some upside risk coming, we just do not see it today.
As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.
- In Asia, 7 of 11 markets closed higher: Shanghai Comp. +0.62%, Hang Seng -0.63%, Nikkei +1.03%.
- In Europe, 10 of 12 markets are trading lower: DAX +0.11%, FTSE -0.12%.
- Morning headline: S&P Futures Seen Higher; Markets Cheer Yellen Appointment
- Total volume: 2.35 mil ESZ and 8.3 k SPZ traded
- Economic calendar: MBA purchase apps, Charles Evans speaks, wholesale trade number, API, 10-year note auction and the FOMC minutes.
- MrTopStep Closing Print video