October 9, 2023

8:15 am

Good Morning!

SPX futures gave back roughly half of Friday’s gains over the weekend, making a low of 4267.50 before a bounce.  It has yet to probe the 200-day Moving Average at 4206.37 that may determine the nature of this decline.  The Cycles Model suggests another two weeks of decline should the 200-day be violated.

In today’s options expiration, 4300 is heavily contested, with 8,822 call contracts vs 6,358 put positions.  Long gamma may begin there with follow-through starting at 4310.00.  Short gamma begins at 4275.00 with reinforcements at 4250.00.

ZeroHedge reports, “US equity futures, Asian and European stock markets and bond yields all dropped while oil prices and the dollar jumped in a global rush for safety after the sudden war between Israel and Hamas raised fears of a wider conflict. Investors avoided traditionally risky assets such as stocks and instead bought gold, bonds and the dollar. As of 7:45am,S&P futures dropped 0.6% to 4314, after earlier trading as low as 4,300 and reversing much of Friday’s brutal squeeze higher, while Europe’s Stoxx 600 slipped 0.2%, having traded between gains and losses. West Texas Intermediate jumped 4% to almost $86 a barrel, after earlier surging more than 5%, spurring a rally among European energy producers while Defense stocks such as BAE Systems and Saab AB also rose. Gold climbed 1% and index of dollar strength added 0.3%. ”

VIX futures shot up higher, reaching 19.60 before settling above the trendline at 18.30.    There may be a risk that the VIX may probe lower to the 50-day Moving Average at 15.77 before resuming its uptrend.

Wednesday’s op-ex shows Max Pain at 18.00, with short gamma extending to 15.00.  Long gamma begins at 19.00 and has support to 42.50.

Treasury markets are closed today, but the early morning futures show a decline beneath  Friday’s close.  However, TNX is in the midst of a spurt of trending strength which may cause the rally to resume after the close of market hours.

ZeroHedge remarks, “There was a remarkable chart in the latest Flow Show note from BofA resident bear Michael Hartnett: after peaking in July 2020 and in the subsequent 28 months drawing down by a record 25%, this is now the single greatest bond bear market of all time!

Considering that BofA’s historical data goes back 236 years all the way to the founding of the republic, this is a jarring statistic, and a poignant reminder of the magnitude of the pain rippling through the financial world in the aftermath of an inflation shock and interest-rate surge that few saw coming… a shock which Deutsche Bank last week quantified as a $70 trillion Mark to Market hit to duration portfolios (while some may claim it’s not a loss unless you actually sell the bond, the truth is that any bond which is pledged as collateral in the repo markets or elsewhere is valued daily, and the cumulative haircut assuming all eligible duration was pledged is, drumroll, $70 trillion).”

USD futures probed lower to 105.89, venturing beneath the Cycle Top support at 106.04.  Should it remain above the October 6 low at 105.68, the rally may resume in strength.   However, there is the risk of a deeper retracement before the Cycle completes to the upside.  The lack of direction given by the closure of the Treasury market today may give a brief respite to the ongoing rally in USD.

Crude oil futures rallied to a weekend high of 87.23 before settling back down to the 50-day Moving Average at 84.66.  The bounce, at its extreme, retraced 43.5% of the decline.  This does not qualify as a change in trend, despite the magnitude of the move.

ZeroHedge notes, “Just days after the fastest drop in the price of oil in over a year (when mere days earlier Brent almost touched $100), the oil market is facing yet another potential kneejerk shock, this time in the opposite reaction.

In response to the sudden war between Israel and Hamas which could escalate and potentially drag in states such as Iran, Goldman’s commodity desk has laid out its thoughts on how the oil market may react. We excerpt the highlights below (full note available to pro subs).”

Gold futures rose to an overnight high of 1869.15 before consolidating.   The Cycles Model suggests a possible rally toward the Lip of the Cup with Handle formation near 1900.00.  There is approximately a week left in the current Master Cycle, reinforcing te idea that a further rally may be needed.