The problems with old pillars of the market

The problems with old pillars of the market  is they gradually crumble, most especially when the primary props are progressively withdrawn, weakening the pillars 'as if' they were salt. The churning of markets seems biblical relative to a majority of distribution patterns (all year long); with perhaps the outcome also of a biblical recollection (like the pillars of Sodom & Gemorah?). At least Thursday seemed pretty ominous as a 'cycle ending warning', though the cycle ended much earlier this year. Not just with equity market performance as the projected distribution (under-cover of buybacks and so on) commenced, but also as 'monetary policy' telegraphed the FOMC's intentions by 'tapering', then trying to postpone getting out of their self-induced corner with minimal volatility disruptions to markets.

I mentioned Wednesday that Chair Yellen had to do this before a new political year; that we thought they would even though it wasn't economically justified, and that next year sees several 'hawkish' new voting members on the Board; a further reason for the FOMC to proceed. In the last couple sessions I called for a rally because too many shorts could be trapped, as well as believing the 'option writers' wanted the S&P to stay within the 2000-2100 range through the Expiration, so the rumored huge out-of-the-money lower-strike price Put buyers (especially) would not be able to 'Put anything to the writers'. That worked too. Last night I also said we might go short as soon as Thursday morning again; a further reason I was so pleased that shorts got run-in Wednesday helping set it all up. I am amazed it worked out this well, without the market going back to a fully overbought condition. Now I suspect you won't see that, as prospects from a technical analysis basis (not even considering the wrong-headed Fed spin on 'why' they moved, which they needed to do; but it's not so calm in recovery as they claimed. Nor is it early in the recovery as Chair Yellen said; but rather late to be candid). Prospects are definitely technically damaged by Thursday. 

Thursday was an S&P 'outside-down' session, technically. That's a higher high, a lower low; and lower close. It's the end of Expiration so not to overemphasize it, but we saw the feeble follow-through and knew how currencies were responding. Of course, an immediate flattening of the yield curve, and the opening long on the first dip for a gain, but primarily as stated to position for a new short.  There is great significance to these pillars the bulls rationalized as crumbling. As a Fed struggles to unwind its Balance Sheet there are big issues. Also Natural Gas made new 'inflation adjusted' lows; putting pressure on investment units of various structures in the Energy area. Today was a reminder that the dynamics of this market remain 'range-bound distribution' that I've outlined all this year. 

Oil and credit are dragging the markets around; with a Fed intervention toward the last possible moment, rather than proactively earlier. They claim proactive or earlier action, but that's ridiculous given the data-points they proclaim as key. The Fed's decision was based on being backed-into a corner, which is why I'd said either way they move would be welcome; either viewed as a mistake (if they did nothing, or what they did, presented as dovish but when we looked at the Reverse Repo today it was clear that liquidity remains pretty low). So let's assume the decision was an unavoidable policy mistake. The Fed tried to talk-down the Dollar; a total failure as the Greenback surges as we expected.

All of this (all the way since Draghi's ECB move) has brought huge whipsaws for investors and bond traders, and the bottom-line is we're not going to take-off to the upside with economic acceleration, and selling-the-rallies has indeed been the way to go. That's on-top of seasonality and in-spite of this Quarterly Expiration. This remains a market desperately trying to hold together, with sort of 'negative feedback' loops coming from energy and High-Yield woes into other areas too. Remember the buybacks are tapering too; borrowed money buying stocks was part of what held-up markets so they could be sold into. Those are the pillars of salt for this market; China growth crumbled too; financial engineering ending in a slower borrowing process, as the ease of capital contracts.

This afternoon I chatted not about 'high-yield' borrowing (not wise), but about a slew of technical and global issues with an S&P trading professional in Ireland who also focuses on global matters. While we both concurred on 'submerging' market issues including debt, he enlightened me a bit to problems even Ireland is facing, which an extraordinary number of residential mortgages under water, an inability for average people to avoid debt by walking away and how much is obscured by many American technology companies operating there (low taxes; a topic well known in recent years). It's the global debt that's most worrisome. 

In sum: it's not that the Fed made a wrong decision; they did what they needed to. But not for the reasons enumerated by Chair Yellen. And it backfired, with a thump on Thursday. This was more than an Expiration outflow; it might briefly be reversed after downside follow-through that's likely (as foreign markets initially following the US higher go back on the defensive); and because it was also the kind of 'key reversal' turnaround Thursday, it will trigger technical analysts too. 

An aside that we hope is unwarranted, earlier today we reported that Sweden is now the victim of at-minimum an Islamist propaganda attack; as civilian as well as government-employed citizens received threatening letters demanding they convert to Islam within three days or suffer barbaric consequences. We pray Swedish authorities can trace all that and preempt even fear mongering attacks like this. Note that Sweden has finally reimposed some border controls itself. 

'Head's-up' is a new game title debuted concurrent with the Star Wars premier. It might also be appropriate to let you know that while the President appeared today with no mention of specific risks, no mention about Sweden now, nor any specific threat for the holidays, it seemed there was more than he was saying. I just learned from an entertainment site, 'Deadline Hollywood', that NATO is now warning theater owners about security concerns (NATO in this case is National Association of Theater Owners) related to the large crowds converging for this opening. There were two incidents, one in Southern California and the other in Tempe (outside of Phoenix, where Arizona State Univ. is located) where some odd behavior (to put it mildly) occurred. In both cases 'middle-east' looking men got out of vehicles without license plates, barged into theaters either asking for details about size and timing of films, and then took cellphone videos within the auditorium and the concession stand lobby areas (in one case side exits too).

I don't want to raise concern but if I (or kids) were going to see the premier, I'd be darn sure they knew their 'situational awareness', which means at least an idea of two things: how to get out fast if need be, and where they might hide if exits were blocked. Horrible to say; and fear is what the terrorists want to instill, but safety first. Also theaters have increased security guards at the facilities. Of course that will help with inspecting backpacks for smuggled drinks or popcorn; not against a 'raid' by Islamic terrorists, heaven forbid anything occurred. After Paris and a similar report to San Bernardino Police of such a drive by photo-op, it would be denial to pretend this isn't a concern. Today was the first day where security has been increased at Disney theme parks in Cali and Florida; and at SeaWorld in addition to Universal (Orlando, which has a StarWars iMax venue).

Finally; does this relate to markets? Absolutely. One more event, tragic or even if the worst is averted, would lead to further 'cocooning' and less interaction and outside activities, impacting all sorts of segments; though of course secondary to basic protection needs. Another Islamist was indicted today; a US citizen from Yemen, as the news 'may' have reported just matter-of-factly. Stop the political correctness; it's time for Government to enlighten the public about 'temporary' if undesired processes that must be implemented until a cessation of hostilities.

Bottom-line: hoped to short (fade) a spike; but since all we got was a dud after futures were higher overnight, we bought the first dip; with intentions of shorting it (as outlined); after taking 2 or 3 handles gain on the long we went back short, at the March S&P / E-mini 2055 level. It is retained overnight.

Daily action - emphasizes not just the decline, not just limited follow-through as was evident with flattening yield-curves, and declining foreign currencies as we suspected would be the case (along with a stronger Dollar) immediately in the wake of the Fed move, but how 'technically' Thursday was a key reversal. That's an 'outside-down-day'; higher high, lower low, and lower close. Now sure, it's Expiration and we have the issue of enormous Put options both with strikes above and below current levels that may be a focus with respect to the morning in particular. However, aside the 'wide bets' on moves over 2100 or under 2000, there is said to be enormous open interest (or was) around 2045-2050. 

 We close at 2025, so already 20 handles under that area, and our short as implemented Thursday morning is from 2055, which was above the high-end of that purported concentration. So perhaps some of this afternoon's decline was, in fact, attributable to writers having those 'Put' to them, and quickly liquidating. That's a topic that's hard to discern, but will be shown to be relevant, only if the downward price behavior were to evaporate almost immediately. But even then you still have the sensitivity to Oil prices and the Dollar strength, as influences.  So I tend to suspect some of this will be rationalization. For instance: even if we get a heavily downward tilted Expiration (so far that's exactly what we have, as this seems in-line with the rumors we've shared for a couple weeks of huge Put positions in the S&P, whether that's at deeply lower strikes, or basically around where we shorted from today). What I do know is that we stood aside on the 'runs' of the shorts on Wednesday; we got short via the reversal this morning, and for the rest of Thursday stayed short from March S&P 2055.  

Thus the stories of heavy Open Interest appear to have been correct, without a knowledge of which exact prices prevailed. Regardless the market accelerated to the downside, and we were on the correct side of the ledger for this one. It's even better tonight (at least for the moment) as futures as of just before 9 pm ET US are off almost 600 or 6 handles more, at 2019 or so.  Whether a trader took partial gains or not (we mentioned that after seeing the 10 handle or more gain, as we always do when there is a move of that size of course), we wanted to be 'officially' short the March S&P from 2055, and even indicated a suspicion that this move will trigger an up-down reversal in Asia as well perhaps in Europe, at least for the start of their Friday sessions. Also we'll likely see more FX weakness against the DX, with the U.S. Dollar pressing 100 again. Yes it's a crowded trade, but we correctly argued that recent consolidation as a temporary correction before the Greenback pushes over 100 again; and that in the wake of the rate hike the Dollar would firm, not decline. That's the case and we see it going higher.  

I do expect a good deal of alternating volatility Friday due to the Expiration with the balance of 'open interest' closed. Then sure, you might get some type of relief rally or respite, but the interesting part will be if that fails to revive any upside of substance, not only in later Friday trading, but early next week. For now we're simply staying with a 2055 March S&P short-sale, with nothing officially as a control, but the break-even stop on retained positions, for now.