E Markets Linger At Critically Low Levels Going Into Another Critical Week Of Trading

For equity market bulls, we are nowhere near that which you would like to have found the markets finishing the week. We have been stating for some time now, that the mechanical/technical/quant/algorithmic correction has taken hold of the marketplace. It continuously seeks out and finds most every important S&P 500 (SPX) level on a weekly basis, bringing about a bear market condition in many sectors such as the financials (XLF) and many of the FANG stocks to boot. In the previous trading week, the key level for the S&P 500 was the October low of 2,631; the S&P 500 closed at 2,633. For the week that was, the next target level to the downside was forecasted to be the S&P 500 closing daily low from February of 2,581. On Monday, the S&P 500 made a B-line to that level, touching 2,583 before rebounding. Obviously, narrowly missing the 2,581 mark was akin to the narrow miss from the October low in the previous week, but none of this matters as the S&P 500 managed to close below the key psychological level of support being 2,600. The main point I'm demonstrating through the key market levels is how fundamentals have given way to aglos/quant trading programs.

What was eerily interesting about the market last week is that while the S&P 500 fell another 1.2% on the week and is now down roughly 2.75% on the year, the VIX actually fell for the week. The VIX ended the prior week at 23.33 and fell nearly 5% to 21.63 in the week that was, diverging from its inverse correlation to the S&P 500. Does this happen often; no, not really. But here are the instances for which the S&P 500 was down over 1% in a trading week and with the VIX falling greater than 5% in the same trading week.

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To reiterate the strength and reliance on algorithmic trading, this divergence is identifying just how controlled the sell-off in the overall market has been during the correction period and unlike that which we had seen from the February-April correction period, which further evidences the rise of algorithmic/quant trading programs.

There are several reasons for the VIX to have not been responding as most would anticipate with a near 12% correction from the peak level of 2,940 in September.

(Click on image to enlarge)

As shown in the chart of noncommercial net long VIX Futures interest, the trend of positioning long has lasted for nearly 2 months now. This indicates that the short-VOL, normal positioning has been absent and many institutional traders have already deleveraged and protected their long portfolio positions.

Something else I'm seeing in the way of hedging risk and buying protection via SPX options also identifies that fund managers have greatly deleveraged themselves leading up to the October-present correction. Based on the following chart, there doesn't seem to be a lot of demand for further-out-of-the-money, two-month put options on the S&P 500 or Nasdaq 100, relatively speaking.

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