The Middle East war drums are beating again. Crude oil is on a six-month high, bonds are up and the S&P down. In the world of risk on / risk off, Syria is casting a big dark cloud over the markets.
Yesterday the the markets suffered their worst day since June as geopolitical concerns rose over a possible U.S.-led military strike on Syria. The timing could not be worse for the economy. It always feels like it’s one step forward and two back for the U.S. and its economic recovery, and surely Tomahawk cruise missiles striking Syria’s military infrastructure will not be a positive for the stock market.
Timing is everything
[pullquote]Our view is that “everyone” now thinks the S&P is going down, and generally that means the S&P could be getting ready for a bounce.[/pullquote]With the U.S. Congress set to return on Sept. 9, the political debate about the debt ceiling is already raging and the long-term question surrounding the Fed’s tapering of its quantitative easing program is still front and center. Things are starting to pile up on the stock market and it’s not looking so good right now. Yesterday the S&P closed under its 100-day moving average for the first time since June 24. As the risk has gone up portfolio managers are hedging stock positions and liquidating. You could see it in the price action between the S&P cash and the S&P futures as it was a nonstop sell program yesterday.
20% jump in the VIX
Uncertainty has run rampant as reflected in the CBOE’s VIX. In the last two trading days the VIX has jumped 20%, which also pushed gold prices up to a 15-week high. Yesterday all 10 sectors of the S&P closed lower and 80% of all the stocks on the NYSE and Nasdaq closed lower.
While Tuesday’s trade marked the largest one-day decline since June 20, the index is down 2.9% for the month and on track for its worst month since May 2012. Traders are worried about a possible disruption of Middle East oil supplies which could affect the entire commodity sector.
The Asian markets closed lower across the board and Europe is down modestly this morning. Its obvious that people are concerned about the possible intervention of the U.S. military in Syria. It’s not what the public or the markets want.
Iranian and Syrian proxies are getting ready to turn their guns on Israel if any attack takes place and the Chinese and Russians are saying an attack will light up the Middle East. As I write this, a new headline just hit Twitter saying Iran’s Khamenei says “U.S. intervention in Syria would be a disaster, the region is like a gunpowder store and the future cannot be predicted.”
The U.S. cannot ignore its responsibility as the “global sheriff,” but it is not going to help our economy, nor is it going to help the war on terrorism. What it does is puts the U.S. back in a spotlight that it no longer wants to be in. The threat of sectarian and tribal conflicts will only get worse, but what are the options? Sit by and do nothing?
Our view is that “everyone” now thinks the S&P is going down, and generally that means the S&P could be getting ready for a bounce. Yesterday Sam Easley, a member of the MrTopStep trading room collective, said “cover some shorts at 1627.00” and the low was 1626.80.
Our desk has been looking for support at the 1620 to 1625 level. While we always remain concerned about a short covering rally, we just don’t think the down move is over. We know you can play both sides of the S&P by buying into new lows and waiting for the 2- to 4-handle pops, but we lean to selling the pops.
With the idea that we could wake up in the next few days to cruise missiles striking targets in Syria, the long side just doesn’t seem that appealing. The S&P has been down 7 out of the last 10 trading days for a total loss of 60.6 handles. On the month the S&P has been down 10 out of the last 19 days.
In Asia, 9 of 11 markets closed lower (Shanghai Comp. -0.11%, Hang Seng -1.60%, Nikkei -1.51%).
In Europe 11 out of 12 markets are trading lower (DAX -1.37%, FTSE -0.54%)
Morning headline: “Prepare for the Worst, US Readies to Strike Syria”
Total volume: 2.25 mil ESU and 12.3k SPU (mostly ETFs) traded
Economic calendar: MBA purchase apps, pending home sales, API and a 5-yr note auction
MrTopStep Closing Print Video: http://mrtopstep.com/2013/08/mrtopstep-closing-print-08-27-2013/