Well it’s been a long time coming. The longs have had a free ride, and the bears have been chomping at the bit for over three months. With the VIX trading down to 8.84, the lowest level on record since the CBOE started posting prices in 1990, you had to know things would not sit still forever.
Some traders are saying the sell off was due in part to a note written by JPMorgan’s Marko Kolanovic, a widely read strategist, comparing the market environment to 1994 and 2001. Here’s what Kolanovic wrote:
Over the past year, correlation of stocks and sectors declined at an unprecedented speed and magnitude (see figure below). A similar decorrelation occurred on only two other occasions over the last 30 years: in 1993 and 2000. Both of those episodes led to subsequent market weakness and an increase in volatility in 1994, and 2001.’ He went on to say over the past two years that “volatility near or at record lows by a handful of measures should “give pause to equity managers,” and that “low volatility would not be a problem if not for strategies that increase leverage when volatility declines.
Big News Algo Stop Run
It’s hard to say if it was actually Kolanovic’s note, because before it the hit the wire, the Dow Jones Transports (DJT) were down over 2% early, and were down over 300 points late in the day.
That said, the S&P 500 futures (ESU17:CME) was trading around the 2479.50 area at 11:32 CT when JPMs Kolanovic came out with his note, and by 12:41 CT, the ES had fallen to 2457.00, a 22 handle drop in less than an hour. The Nasdaq 100 futures really took a hit, going from the 5995 area, all the way down to 5845.25, a 150 point drop in the same time frame. Either way, the combination, and the timing, supplied a midday knock out punch that was a very long time coming.
After the subsequent lows the ES traded back up to the 2467.50 level, and the NQ traded up to the 5897 area. At 2:30 the MrTopStep imbalance meter (MiM) was showing $175 million to buy, and not long after, the ES traded 2470.00, and then on the 3:00 cash close, it traded 2473.00.
Amazon, which was the other big topic of the day, reported its earnings after the bell, and missed… The stock fell $22.00. After the report the NQ and ES sold off slightly, but bounced back up in the aftermarket.
In the end while it was a wild day of ups and down, the S&P 500 futures (ESU17:CME) settled at 2472., down 1.25 handles,or -0.04%, the Dow Jones futures (YMU17:CBT) settled at 21,741.00, up 95 points, or +0.44%, and the Nasdaq 100 futures (NQU17:CME) settled at 5905, down 42.25 points, or -0.71%.
August Outlook: Typical Strong Post-Election July Points to August-September Break
According to the Stock Trader’s Almanac:
We are currently experiencing a typically strong post-election July. With VIX low, sentiment high and stocks up, the time is nigh for the August-September slide. In addition we now have a Dow Theory Signal as the Dow Transports have just fallen rather sharply, down 5.7% in the past two weeks including a 3.1% drop today. All this weakness in the Transports has occurred while the Dow Industrials continues to log multiple new highs this month.
This lack of confirmation or synergy between the two oldest U.S. market benchmarks just triggered a Dow Theory Sell Signal. When the backbone of our economy that transports goods across the nation does not perform well it is an indication that there is underlying economic woe. It is not always right and like everything else it is subject to interpretation, but it does have a solid track record and is worth heeding here as our other indicators are pointing to a summer selloff around the corner.
While You Were Sleeping
Overnight, equity markets traded mostly lower, led by the Korean Stock Exchange, which closed down a whopping -1.73%. Meanwhile, in Europe, all major markets are currently trading lower this morning after some weaker than expected tech earnings, and will likely close out the week on a low note.
In the U.S., the S&P 500 futures opened last nights globex session at 2472.00, and that opening print would end up being the overnight high. The ES traded in a 10 handle range ( from 2472.00-2461.50 ) overnight for the first time in weeks, and volume has made a significant improvement. As of 7:00am CT, the last print in the ESU is 2465.50, down -6.5 handles, with 175k contracts traded.
In Asia, 8 out of 11 markets closed lower (Shanghai +0.13%), and in Europe 12 out of 12 markets are trading lower this morning (FTSE -0.63%). Today’s economic calendar includes the GDP report, Employment Cost Index, Consumer Sentiment, the Baker-Hughes Rig Count, and Neel Kashkari Speaks.
Nothing Goes Up Forever
Our View: The PitBull mentioned that Terry Laundry (MagicT) always said that when the Dow Transports are the market leader, when they go, so do the rest of the markets. Yesterday was amazing, we got a big sell off and bounce back. Is it over? I don’t really know, what I do know is that the sellers came back in force, and more probably stayed short than covered. Our view is to buy the early dips and sell the rallies. This is probably not over yet.
PitBull: CLU osc 26/8 turns down on a close below 48.15; ESU osc 11/16 turns up on a close above 2483.95; VIX osc 2/-7 turns down on a close below 9.25.
Market Vitals for Friday 07-28-2017
[gview file=”https://mrtopstep.com/wp-content/uploads/2017/07/Market-Vitals-17.07.28.pdf”]
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 8 out of 11 markets closed lower: Shanghai Comp +0.13%, Hang Seng -0.56%, Nikkei -0.60%
- In Europe 12 out of 12 markets are trading lower: CAC -1.04%, DAX -0.40%, FTSE -0.63%
- Fair Value: S&P -3.02, NASDAQ -0.54, Dow -56.21
- Total Volume: 1.6mil ESU, and 200 SPU traded in the pit
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