The overall movement of the S&P 500 futures in first 8 trading days of 2016 has been extreme. Adding to the extremes is the continued drop in the price of crude oil which fell below $30.00 on Tuesday for the first time since 2003. Yesterday, the S&P 500 futures (ESH16:CME) fell from a Globex high of 1946.50 all the way down to 1878.00 before 2:00 CT, that’s a 68.50 handle, or 3.9%, drop from the high to the low. The Dow Jones futures (YMH16:CME) fell 505 points, or 3.5%, and the big loser, the Nasdaq 100 futures fell 198 points or 4.75% from the days high to the low with Societe Generale and Morgan Stanley being the latest bank to advise its clients to: “Sell everything except high quality bonds,” adding oil could fall to $20 a barrel. Royal Bank of Scotland issued a dire warning: “Prepare for a financial cataclysm, with stock markets falling by as much as 20%.” (http://www.telegraph.co.uk/finance/economics/12093807/RBS-cries-sell-everything-as-deflationary-crisis-nears.html). Christian Mueller-Glissmann at Goldman Sachs warned that the China-fuelled global stock market meltdown is likely to get worse, and Standard Chartered became the latest major bank to downgrade its oil outlook.

2007-2008 Bears Are Back; Sell Everything

In the final quarter of 2015 many of the big hedge funds cut their stock exposure. At the time the markets were volatile but not as volatile as they are today. How bad can it get? As we said a few days ago in the Opening Print, a lot of what is going on is not just in the stock market, but the ongoing currency wars. According to Société Générale’s strategist Albert Edwards, the dollar had risen by as much as the Japanese yen had in the 1990s, an upwards move that pushed Japan into deflation and caused solvency problems for the Asian country’s banks. He added that a sign of the crisis to come was the collapse in demand for credit in China. “That happens when people lose confidence that policymakers know what they are doing. This is what is going to happen in Europe and the US.”

Over the course of the last few years there have been many occasions, including the 2010 flash crash, that have had me thinking that we’ve never seen the overall price action that we see today. The increase in electronic and algorithmic trading, and the decrease of humans buying and selling, has not only made trading more difficult but has increased the risk dramatically. When George Soros came out in the first week of the year saying that the stock market was off to its worst start since 2008 I knew it was actually the worst start to a year in the history of the markets. So what does that say about where the markets are going today? One of the problems with the markets right now isn’t just the doomsday calls by the banks. There is real fear running in the marketplace and you can see it in the Chicago Board of Options VIX. When the S&P rallies the VIX doesn’t fall. The other part about this is the S&P’s inability to hold any rally. It’s clear to see that the big institutions are selling stock and stepping back. With the S&P down nearly 7.5% the big question is will buyers appear at the 10% correction level?

I mentioned the word deflation several times in the last few months, and while I never knew the markets would drop so hard so quickly, it wasn’t hard to figure out the direction the markets were taking after the first few days of the year. The PitBull told me over two weeks ago that while checking his charts in the S&P the only thing he could come up with were the downside gaps. He was right and that’s where we’re heading now. Last night the ESH16 double bottomed at the 1874.50 level, the first gap fill is 1867 and the one below that is 1820. So far the S&P 500 futures have been off to a rough start with 5 of the first 8 session on the year being down a total of 150 handles. That’s down -7.5%, or down -12% from the May 2134.00 high.

Jan 4th -26.50
Jan 5th +2.75
Jan 6th -25.75
Jan 7th -53.00
Jan 8th – 21.50
Jan 11th +2.75
Jan 12th +10.75
Jan 13th -43.50

It has then a bloodbath so far in 2016, and while I know the big bear walks at night, I’m not 100% sure that the markets are going to sell off as hard as many of the banks and big Wall Street analysts are talking about. The markets go up, the markets go down, and after a six-year rally and a 220% gain in the S&P 500, selling back off to the August lows should not be seen as out of the ordinary. Rates are going higher, China is melting down, and there has been no significant pullback in the stock market for several years. In most cases a leap in volatility is a good thing for futures day traders but a very bad thing for the long-term holders of stocks and options. As I’ve mentioned many times over the last few months the Federal Reserve is sitting on a $-4.5 trillion balance sheet. When you combine all the moving parts of the S&P being up so much over the last several years it should not be a surprise to anyone that the markets are going south right now.

In conclusion, I still think there’s going to be some type of rally going into the end of the January expiration, what happens after that is anyone’s guess.

In Asia, 10 out of 11 markets closed lower (Shanghai Comp +1.97%), and in Europe 12 out of 12 markets are trading higher (DAX +-2.73%). Today’s economic calendar includes Weekly Bill Settlement, James Bullard Speaks, Jobless Claims, Import and Export Prices, Bloomberg Consumer Comfort Index, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 10-Yr TIPS Announcement, 30-Yr Bond Auction, Fed Balance, and Sheet Money Supply.

Our View: If you have been losing and you feel that the market owes you something you may want to go down to your local Chipotle and ask for that one dollar burrito. It may not do much for your trading account but at least it will get you out of the house. On a more serious note the markets are in a big down trend. The question is how far will they go? With China firming up overnight, Europe down, and the S&P up ticking this morning, I think there’s a possibility that the S&P trades back up near the 1900 level. Based on how the S&P went out at the end of the year I knew it may be a rough start for the stock market. So far so good. That said, I think everyone is just too negative and just too short at the current level. Our view is for a bounce today, the question is will the S&P hold? If the answer is no say hello to the PitBulls ‘gap fills’ just below.

Download all of the January expiration stats here.

As always, please use protective buy and sell stops when trading futures and options.

‘The S&P 500 Futures and the 2016 Downside Rout’

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• In Asia 10 out of 11 markets closed lower: Shanghai Comp +1.97%, Hang Seng -0.59%, Nikkei -2.68%
• In Europe 12 of 12 markets are trading lower: CAC -2.92%, DAX -2.78%, FTSE -1.83% at 6:30am CT
• Fair Value: S&P -7.71 NASDAQ -9.28 Dow -95.10
• Total Volume: 2.9mil ESH and 8.1k SPH

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