October 14, 2022

12:00 pm

The beginning of earnings season (read: here and here) has not been kind to banks as we are seeing a reversal from yesterday’s short-covering surge.  It is still bearish, despite the rally, and especially so, now that it has crossed beneath the minor formation trendline.  Banks have been hit with interest rate losses and investment security losses.  I wonder how much of the “investment banking” is in the options market?


1:45 am

SPX tested the 61.8% retracement level briefly this morning, then reversed down to the Lip of the Cup with Handle formation at 3610.00.  The panic Cycle is underway and we may see more days like yesterday, but at a much lower level.  Remain/sell short.

ZeroHedge remarks, “A large short in both stocks and bonds triggered a burst of position covering yesterday, causing stock prices to surge and yields to drop. However, while this may be a bottom in equities, it is unlikely to be the bottom while financial conditions remain very tight and real money is still very long.

One veteran trader friend described it to me as “the wildest 60 minutes since the flash crash, an inverse flash crash”. This was a short-covering rally at base. The market was not only very short equities, it was very short bonds too. According to the CoT data, the net short in US equities and Treasuries is as large as it has been going back to 2004.”

Further remarks from ZeroHedge, “When Goldman’s flow trader John Flood discussed yesterday’s tremendous market squeeze, he refused to hide his skepticism that the rally would continue, to wit: “From my seat this does indeed appear to be yet another bear market rally that should be sold. CTAs dont become size buyers until north of 3900 and buybacks will remain in blackout until 10/25. No signs of FOMO buying from L/O community (yet) as they still sit on over $230b of cash (ATH).”

So far he has been spot on, although that too may be a fluke, and merely a case of calling anticipated short-term mean-reversion. Indeed, as JPMorgan TMT trader Ron Adler wrote last last night in “THE REAL TEST”… ” for all of those who called up on the day this morning because they knew no one would remember or care if we ended the day -3%, OR had someone send them the obligatory circuit breaker email and decided that the contra indicator had occurred” the question is “UP OR DOWN FRIDAY….AND HOW MUCH?*”


7:50 am

Good Morning!

NDX futures rose to 11132.00 in the overnight session, but has since eased down nto the red.  Yesterday’s close was beneath the Lip of the Cup with Handle formation at 11040.00 and also beneath the 38.2% Fibonacci retracement level of last week’s decline at 11077.00.  The overnight session bounced short of the 50% retracement level at 11188.00, a weak bounce but expected in a Wave [3].  There are four weeks left in the current Master Cycle, soon to be a panic decline.

In today’s op-ex, Maximum Pain for options investors is at 10980.00.  Long gamma begins at 11000.00, so the rally elevated NDX out of short gamma, possibly beginning at 10950.00.  The QQQ (closing: 268.82) shows Max Pain at 366.00-267.00.  Long gamma begins at 270.00.  Short gamma starts at 265.00.

Yesterday afternoon ZeroHedge remarked, “A little over an hour before today’s CPI report, we published a snapshot of current hedge fund exposure, warning that “net equity positioning fell to fresh 5-year lows ahead of the US CPI data”…

… and concluding that “sentiment has completely bombed out – yes the CPI may come in hot, and will likely lead to more selling, at least initially, but everyone is already positioned for this.”

Fast forward a few hours, when shortly after the dismal CPI print which even Bloomberg said a “disaster for Democrats“, the market reaction has been precisely as expected, with stocks first tumbling as much as 3.3% before soaring 5%.”


SPX futures rose to 3702.40 in the overnight session before declining beneath the close.  I mistakenly said that the 50% retracement of this week’s decline was at 3681.00.  It was 3687.21.  The significance is the daytime high was beneath that level.  So, although retracement rallies may run hot, they may still fall short of normal Fib retracements.  That is the nature  of panic declines, which began a week ago.  There are four weeks left in the current Master Cycle.  Fasten seat belts, please!

Today’s op-ex shows Maximum Pain for options investors at 3665.00.  Go figure.  Long gamma begins at 3680.00.  Puts were sold yesterday, lowering short gamma down to 3625.00, while both puts and calls are heavily populated at 3650.00.

ZeroHedge reports, “Welcome to the final day of the week and first day of Q3 earnings season, which coming after yesterday’s torrid post-CPI reversal, has already seen a flood of newsflow and market volatility: while JPM reported solid earnings this morning to launch the latest earnings season helping push its stock higher in the premarket, followed by mediocre results from Wells and Citi and a soggy update from Morgan Stanley which sent its price down 3%, the big news of the day is the unexpected termination of UK chancellor Kwasi Kwarteng who was summarily fired as a scapegoat for the unprecedented chaos gripping the UK over the past month.

And with traders desperately scrambling to stay on top of all the flashing red headlines, futures are surprisingly flat, as S&P 500 and Nasdaq 100 futures flip between losses and gains as corporate results started rolling in. US banks are expected to post the biggest profit decline of any S&P 500 Index sector, according to data compiled by Bloomberg Intelligence, even as energy props up the entire market. The fear is Fed tightening will spark defaults and force banks to set aside higher provisions against losses.”


VIX futures declined to 31.59, but have rebounded as I write.  Frankly I was curious why VIX had not risen during the 2% slump yesterday morning in the SPX.  The reason is that the hedge funds were selling their SPX puts right out of the opening gate, suppressing the VIX.

VIX is finally beginning its season of trending strength this weekend.  It may be especially strong through October monthly options expiration and November monthly options expiration.  The current Master cycle does not reach its end until mid-December.

There is no Max Pain level in next Wednesday’s op-ex.  Long gamma begins at 30.00 while short gamma starts at 29.00.   Calls were sold and puts were bought (heavily), adding fuel to the coming rally in the VIX.  What is interesting is that calls between 35.00 and 75.00 are being heavily bought.  Hedge fund activity?


Yesterday, the NYSE Hi-Lo Index fell to -905.00.  This tells us there was no serious buying, only short covering which has no impact on the Hi-Lo.  Long ownership appears to be dropping.


TNX declined to 38.51 to continue the probable correction to Intermediate-term support at 35.74.  There may be a shallow low sometime next week as ther appears to be a Trasing Cycle low due.



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