on July 22, 2024

Is It Time To Be Concerned?

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Our View — Is It Time To Be Concerned?

I have witnessed every major stock market crash since 1980, each with its own causes — from foreign currency collapses to the aftermath of 9/11, which coincided with my return from the Middle East. Some declines were prolonged, others brief. The 1987 crash stands out vividly; my S&P desk processed 600 filled orders and twice as many cancellations. We worked on the floor until 10:30 PM and returned by 7:30 AM Saturday morning. The NYSE and S&P (CME) bore the brunt of the selloff, losing $14 billion in stock value, devastating countless investors. Panic selling hit its peak with stocks left without buyers at any price. The Dow plummeted by 68.90 points in two days, a staggering 23.05% drop, blamed on S&P 500 index arbitrage and program trading — the pit’s sole bid being a programmed one.

Fast forward to 1999, another phenomenon took hold — the tech bubble of 1999-2000. Viewing it from the trading floors was surreal and I thought this was doomed from the start; the tech stocks soared daily, culminating in trading rooms popping up nationwide. Most of these young traders were 19 to 23 years old either just getting out of college or mommy and daddy still paying for it. I remember it like it was yesterday, I would get on the elevator at 7:45-8:00 and as the door was closing a hand would pop in and there are 3 kids in sandals, shorts and puca beads, always talking loud about the money they were up buying worthless companies that the knew nothing about. It was almost everyday that an unheard of company got pumped up from $3 to $180 in a few days. I knew all this fast, free money would not last because at my S&P desk, we were counting the days until the crash — it was not a matter of ‘if’ but ‘when’ the Nasdaq would falter.

I don’t know that this is the same thing as today, but in some ways it is. Instead of going into hundreds of tech names back then, today is very different… Everyone is piling into the same 7 to 15 names and they are more heavily placed on the tech side or the Nasdaq. Over the years there have been many times where a crash was telegraphed, meaning we knew it was coming. In 1987 it was Paul Tudor Jones that not only sold the shit out of the S&P futures (we did some of the orders) but he was telling people a crash was coming and the most notable and vocal person to call the 2000 tech bubble was Jeremy Grantham of GMO.

One firm that has also stuck out and — we also did business for — was Mr. Black Swan himself, Nassim Nicholas Taleb, former options trader Taleb, and owner of Universal Investment. Taleb has been on CNBC for years calling for a crash and talking Black Swan events. His system loses money almost every day that only pays off during extreme volatile periods. A few calamities like the 2008 crisis, the 2015 Flash Crash and the Covid-19 market meltdown in 2020 have made enough for a stock investor with a small allocation to his fund to trounce a classically diversified 60/40 stock and bond portfolio.

Now Universal’s Mark Spitznagel, who has made billions from past crashes, sees a severe market crash coming, saying “I think we’re on the way to something really, really bad—but of course I’d say that.” He sees a major selloff / crash with stocks potentially losing more than half of their value. He doesn’t think the decline will happen right away and says that as inflation falls, the Fed’s easing will fuel further gains, but said rate cuts are often the starting gun to the decline.

I know about this company, as they went through my desk. They put in these totally off-the-wall open options orders that were GTC (good till cancel), buying puts that you wouldn’t think would ever get hit. We also had a prop trading firm that used the desk that did the same thing, I think the company’s name was Infintium. I would look at the guys at the desk .10 cent bid for this or that on 2,000 lots and there were other orders being placed at other desks with different strikes. When they did get hit something very big was going on, like 9/11. The idea is similar to short premium sellers, they make tons of cash in a quiet market when the VIX and the ES aren’t moving, but when the shit hits the fan and the VIX blows up they wipe out their accounts. That’s why clearing firms don’t want the business.

In conclusion, we all know what we are up against. We all know how much the value of the US stock market has increased as the Fed raised rates and spent trillions of dollars doing it. We all knew zero rates were not sustainable just like we know the US debt isn’t. I don’t think it makes sense to sit around everyday waiting for a mega crash, but I do think there will be a time in the future when all of this stuff will come to roost. After all… nothing goes up for ever.

Our Lean

After a drop and a pop, I thought for a minute that maybe the selloff was over. The key to this is the “one minute,” because right after that thought, I got short the NQ.

When I look at the decline, all I can think of is how far the ES and NQ have rallied prior to. I think we have to start counting the down days…will it be 3 down days in a row? 4 down in a row? 5 or 6 down days in a row? More? It could come to that, but I think the size of the drops will start to shrink as the ES and NQ fall. The stats say weakness after July 20, but obviously it came early. Septembers have been getting hammered.

The first part of this is, I do not think the current pullback is part of what Universal Investments is talking about. So far, the selloff has been very orderly, but there are a ton of earnings and some big economic reports coming up. Mega-cap tech reports, while we get the GDP report and PCE report this week. On the plus side, there are no Fed speakers, as they are in a blackout period.

I talked about 5540 early in the chat room on Friday: IMPRO : Dboy : (Fri: 9:32:41 AM) : 5540 on TAP.

After opening at 5587, that was a long ways away and that was an ugly close on Friday. There was zero change in the price action — sell all 25 to 35 point rallies. Gold got whacked and Bitcoin closed up almost 6%. The ES is 3% off its high and the Nasdaq is down over 5%. Selling the rallies has been the money trade, but for how long?

Our Lean: I don’t think this decline has fully played out, but if the ES opens lower and volume falls we could see a decent bounce. When I say everything has gone up too much, I think you have to throw the bonds in that bucket too. There are 8 sessions left in July and the end of the month — July 31 — falls on a Tuesday. If the ES gaps lower, I want to buy it.

With the ES down over 170 points from its all time high in just a few days, I don’t think you can rule out bounce. If the ES gaps higher, — ideally 30+ higher — I gotta be a seller and sell the rallies throughout the day. The key to a bounce will be a drop in volume. For reference, the ES did more than 2 million contracts on Friday.

MrTopStep Levels:

How to use MTS levels

MiM and Daily Recap

ES Recap

The ES rallied up to 5607.50 on Globex, sold off to 5568.50, and opened Friday’s regular session at 5587.25. After the open, the ES traded at 5592.50, dropped to 5581.50 at 9:34, then rallied to 5604.75 at 9:42 before dropping ~25 points to 5570.00 at 10:46. It then rallied back to 5583.75, sold off to a new low at 5566.50, and rallied to 5577.00, subsequently dropping to another new low at 5555.25 at 1:33. It quickly rallied ~21 points to 5576.75 by 12:02. After this pop, the ES pulled back to 5571.00, then up-ticked to 5671.50, before popping up to 5578.50 at 12:10 and selling off ~35 points down to 5542.00. The ES then traded up to 5562.25, rallied to 5560.50, and dropped to 5543.50 at 2:48.

After reaching the low, the ES made a higher low and surged to 5568.50 at 3:23, but quickly dropped back to 5547.00 at 3:45. The ES traded at 5549.50 as the 3:50 cash imbalance showed $1.2 billion to sell, traded up to 5554.00, and then sold off to 5545.50 at 2:58, trading at the 4:00 cash close. After 4:00, the ES rallied to 5560.25 and settled at 5552.75, down 41.75 points or -0.75%. The NQ settled at 19,701.50, down 197.75 or -0.99%, the Russell (RTY) settled at 2,204.40, down 12.60 points or -0.57%, Dow futures (YM) settled at 40,550.00, down 408.00 or -1.00%, crude oil (CLU4) fell $2.70 or -3.32%, gold (GCQ4) fell $53.60 or -2.18%, the 10 Yr note (ZNU4) fell 0.135 or -0.38%, and the 30 Yr bonds (ZBU4) closed down 21 ticks or -0.58%. Last but not least, Bitcoin (BTCQ4) settled at 67,975, up 3,680 or +5.72%. Everything was down except Bitcoin.

In the end, the long overdue selloff pushed the ES down over 170 points over 3 days. In terms of the ES’s overall tone, it was weak, but in terms of its trade, volume was on the high side: 282k ES traded on Globex and 1.776 million on the day session, totaling 2.058 million contracts traded.