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Sell-Off Cuts Deep: What's Next for Global Financial Markets?


Investors around the world are on the edge of their seats.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

More than $1.8 trillion of global equity market value was lost yesterday; the sell-off cut deep, it cut hard, and it cut fast. The question on everybody's lips is: Will it cut more?

We dove deep yesterday in an attempt to navigate our forward path, mapping levels of lore, catalysts du jour, and perhaps most importantly, the psychology surrounding the issues at hand.

To top-line a topic that is anything but a quick at-a-glance, I will offer the following observations:
  • Everyone seemingly pointed to Ben Bernanke and his tapering agenda; I would offer that China-and Chinese interbank lending rates, or Chibor-was an equal or larger catalyst for the sell-off. Some liken this Asian juncture to the early stages of our stateside situation in 2007; it's too early to tell if that will play through-there are many moving parts-but the global marketplace began to discount that, in my view. It should be noted that the Chinese government took steps to alleviate fears overnight, which is helping to shape market psychology.
  • Today is expiration Friday (index options expire on the open; single stock options expire on the close), which pushed the tape around yesterday (expiration influences tend to manifest, through increased volatility, in the days prior to the actual expiry). It felt like the tape tried to pin S&P (INDEXSP:.INX) 1600-where there is outsized open interest-and once that gave way, lower strikes served as a price magnet (this dynamic will disappear after stocks open this morning).
  • Gold, and the rest of the commodity complex, took it on the chin. This is a continuation of a preexisting trend, but the price action was notable nonetheless. I offered my humble take on the forward direction of gold; in short, if monetary policy was going to drive gold higher, it would have done so long ago. Opinions aside, we would be wise to note the correlation between gold and the S&P, per the chart below.

  • Social mood continues to sour; this wasn't a "Thursday topic" but it is relevant to this conversation as social mood and risk appetites shape financial markets. With social unrest sweeping streets the world over-and that was with the stateside tape near all-time highs-the mindset of the masses will be put to the test as risk assets decline, even if the wealth gap represents a slimming margin of society.
So what now? Expiration for starters, which is happening as we speak. Traders who are short gamma-click here for that conversation-are hedging their risk, which is impacting the early morning price action and will continue to drive single stocks through the day. These flows are difficult to monitor but they should be respected nonetheless.

Following an outsized move, such as the one we had yesterday, the tape tends to probe that direction at least once the following session. As such, while the futures are green, I would expect a downside test, from which we will monitor our tells for guidance. Yes, we're short-term oversold-the Dow Jones Industrial Average (INDEXDJX:.DJI) lost +/-600 points, the S&P lost +/-70 points and the NASDAQ (INDEXNASDAQ:.IXIC) lost +/-100 points since the FOMC-but we would be wise to remember that we remain +/-5% from recent and in some cases all-time highs.

I've been trading around a short bias, with 50% of a full position in December SPY (NYSEARCA:SPY) puts against a few long positions, including Facebook Inc (NASDAQ:FB) with a tight stop. Rather than cover my S&P short, I gently nibbled on my longs into the close (full disclosure: I'm actively trading them both ways). Water pistol to my head, S&P 1500, which is +/- a 10% correction from recent highs, remains viable, perhaps probable, although I've rolled down my stops on the S&P (to the other side of the trend line) in an effort to manage risk, rather than chase reward.

Lots to discuss in real-time; I'll see YOU over on the Buzz.

Random Thought:
  • I'm keeping a close eye on the Macau gambling names; if China is in fact a banking crisis-or the perception thereof permeates-stocks like Wynn Resorts, Limited (NASDAQ:WYNN), Las Vegas Sands Corp. (NYSE:LVS) and Melco Crown Entertainment LTD (ADR) (NASDAQ:MPEL) could have the feel of some cold dice.

Twitter: @todd_harrison

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