The Roller Coaster Continues: What to Watch for in Financial Markets
Adapt, don't conform, as we together find our way.
We like to say the price action associated with options expiration—which is tomorrow— manifests (through increased volatility) in the days preceding the actual expiration.
That has played through this week, in spades; Monday, the S&P lost 36 points.
On Turnaround Tuesday, they bounced 'em 22 points.
Wednesday, they lost—yep—22 points, to close precisely at Monday's close.
And true to form, in the early goings of Thursday, the S&P (INDEXSP:.INX) is indicating a higher opening.
I actively traded this stretch, as detailed in real-time on the Buzz & Banter (click here for a free trial!) and consistent with my shared strategy of navigating a short bias under +/-S&P 1600.
Yesterday, after punting all but 5% of my SPY (NYSEARCA:SPY) puts into the weakness, I called an audible and reloaded on my downside exposure, rounding it up to 50% of a full position.
With "my level" 50-odd handles away—too wide, through the lens of risk definition—I'm focused on the back-test of the up-trend line that has been in place since November, per the chart below, which comes into play +/- S&P 1560).
My plan this morning is to let the noise settle (the first half hour of each trading session is crowded), gauge the tenor of the tape and take a fresh look. Should market internals skew 2:1 positive, or if the financial complex demonstrates strength (Morgan Stanley (NYSE:MS) reported; watch for the reaction to that news), I won't rationalize my risk.
I told Michael Sedacca this morning that "loose grips" will likely reward the bears—and I believe that—but discipline over conviction has rewarded me over the course of my 23-year career, and it only takes a momentary lapse of judgment to give back hard-earned gains. Good traders know how to make money; great traders know how to take a loss.
Those are my top-line vibes coming into the session—I am writing this pre-market—and as always, we'll update our vibes in real-time on the Buzz & Banter as the market writes the script and Minyanville tells the story.
- Yesterday on the Buzz, I noted that the sub-sectors were getting hit harder than the mainstay averages. While the S&P was down 1.84%, the Nasdaq-100 (INDEXNASDAQ:NDX) off 2.4% and the Dow Jones Industrial Average (INDEXDJX:.DJI) 1.2% lower, the BKX was down 2.7%, the SOX was off 3.4%, the OSX (drillers) minus 3.6% and the XAU 3% lower. As this is a market of stocks and not a stock market, I thought that warranted a mention.
- Perspective Check: The S&P is currently 2.8% below an all-time high; for purposes of perspective, the Russell is off 5.5%, the KBW Bank Index (INDEXDJX:BKX) is down 6% (from recent, not all-time, highs) and gold is down some 30% from 2011 highs (and 21-26% since October, depending on the day).
- This speaks to our discussion earlier this week about how we're at/near all-time highs but nobody feels like we're at/near all-time highs. The last time we had that conversation? Yep, December 2006.
- Not saying history repeats—credit has yet to blink, but then again stocks were off 20-25% in the first phase of the financial crisis before credit confirmed the move lower. So, there is no all-knowing indicator; just best practices in risk management and patience in our approach.
- There are some relative winners out there—Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Home Depot (NYSE:HD), to name a few—and it remains to be seen if retail will be snuffed out as well. In a finance-based global economy, consumer spending is tied to the stock market, or that's presumably the plan on the Beltway.
- The Old School folks, or what's left of them, would argue that nobody is bigger than the market if the market is to remain free.
- The S&P held the 50-day (1542) yesterday, which is near the level we flagged out of the gate (1540). Below there, S&P 1540-ish becomes new-found resistance for bears who are looking to roll down their stops.
- Love and white light to our Boston brethren; know that our thoughts and prayers are with you.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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