Is The Market Slowly Rolling Over? S&P 500 Puts Galore

For 3 straight trading sessions, the major averages have sold lower into the closing bell. This is in contrast to the 9-week rally prior to the final week of February. One thing to keep in mind with respect to the 9-week rally and even the December 2018 market swoon is the concept of market liquidity, as it pertains to volume. Just as the market expressed a lack of liquidity in December and as redemptions were expedited, volume has continued to decline. Having said that, the declining volumes have reversed where the pain is being felt in 2019, from the short side of the market. That can all change in a heartbeat.

What we are better able to understand about the 9-week rally is that it has been led, primarily by a handful of stocks. This was previously outlined in Finom Group’s (for whom I am employed) weekly research report titled The Market is Safe, So Long As You Identify Its Pain Points 

 “The fact is that there might be a group of firms out there in the fund “managementshpere” that are simply so large they understand that if they target one of the most heavily price-weighted stocks in the market, they can essentially move the entire market. That means they cannot only move the Dow, but the S&P 500 and Nasdaq (NDX). If you can drive order flow into the 5 top weighted names in the Dow index you can essentially dictate order flow throughout the markets.”

As discussed in the Research Report, firms are pretty much arbitraging the market by targeting these stocks with Boeing (BA) being the main driver. Beyond that point of articulation and with the knowledge that BA shares are up some 32% in 2019, we also recognize that fund managers really haven’t participated in the 2019 market rally. The following chart, offered by UBS Financial identifies the S&P 500 rally in the face of extremely low active fund manager positioning.

The 9-week long rally has expressed a healthy breadth thrust and found with overbought conditions coming into the trading week, but volume continues to dwindle. Volume is important. Volume shapes support and resistance; it tells you where somebody bought and where somebody sold at a certain price. While market momentum and overbought conditions can persist, they often do so up to a point of rejection, and that is defined by VOLUME. We may have experienced that point of rejection, as the S&P 500 surged above 2,800 and has since fallen back below 2,795.

We’ve already witnessed strong VIX call option buying this week that identifies how uneasy market participants may be after a near 19% S&P 500 rally off of the December 24, 2018 lows. And in Wednesday’s trading session there was stealthy Put buying in the ‪SPX options markets.

The stock market’s strong rally has been accompanied by falling volume. We have supporting charts that identify this point of articulation beyond contestation. Technical analysis suggests that “rallies accompanied by falling volume” are bearish to one degree or another. So let’s now take all this dialogue and try to deduce the possible outcomes near term when S&P 500 rises over 10% in 10 weeks, but volume drops by 50% or greater.

So while I’ve offered a lot of evidence that suggests the market should succumb to more selling pressure near-term, historically and statistically speaking, the table from suggests the pullback would be harmless. Having said that, “this aint your grandpas S&P 500” anymore and when programmed trading kicks in…

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