The Practical Investor

3:05 pm

Waves (1) and (2) took 21.5 days. This afternoon’s high marks 8.6 days from the secondary high at 4595.31.  The Hi-Lo Index is at -75.00.  It may close near the Max Pain zone at 4465.00 for tomorrow’s options expiration.  the 50% retracement value is 4477.36.  There may be an attempt to hold SPX steady through tomorrow’s expiration, but any bad news may set off a panic.

11:10 am

SPX may be approaching a Cyclical Pivot point at 1:00 pm.  Should it remain under 4500.00 and preferably Short-term resistance at 4487.09 in the next two hours, we may have a reversal down.  Technicians are concerned that the bearish gamma may lead to a melt-up just to clear the decks of all the bearish players.  However, bad news may also bring short gamma into play with a potential panic melt-down.

ZeroHedge remarks, “Hopeful signs of a lowering in tensions on the border of Ukraine have sparked a ‘risk-on’ push higher in markets, which will now likely prompt significant Equities “squeeze” flows from the Options space and covering from dynamic hedgers.

Add to the news that Putin is pulling back the fact that China injected a net 100B Yuan into the banking system via the MLF, sending CSI 300 +1.1%, as a further signal of liquidity- and credit- pumping after January’s already all-time record $626B of new Yuan loans offered showed the extent that which Chinese authorities are willing to go to stifle the economic- and market- crunch in the country.

All this combined to a strong session as cash-trading begins and as Nomura’s Charlie McElligott warns, “virtuous” second-order Greeks look set to take-over and further accelerate the spot rally / vol compression into expiration.”

7:45 am

Good Morning!

NDX futures have risen overnight to a high of 14585.90, over 2% higher than the close.  There is a potential Cyclical pivot this morning that may allow it to resume its decline.  However, there are indicators that suggest the bounce may go higher.  The pattern indicates a possible rally to 16000.00 to retest the bottom of the old trading channel.  Wave C equals A at 15592.00.  In addition, the next two days show trending strength.  Tomorrow’s options expiration show calls dominating above 14400.00 and possible long gamma at 14500.00, so be prepared for more positive activity.

SPX futures rose to an overnight high of 4474.40, just beneath the mid-Cycle resistance at 4477.09 and Short-term resistance at 4485.22.  Should the bounce stop near there this morning, the decline may resume.  However, there are indicators that the bounce may extend to test the trendline of the old trading channel near 4750.00.  In this case, Wave C equals Wave A at 4738.00.

Tomorrow’s expiring options show Max Pain at 4465.00, while options turn positive at 4475.00.  Long gamma begins at 4500.00.

ZeroHedge reports, “With less than 24 hours to go until the Feb 16 CNN and CIA-leaked Putin “invasion day” – because if you are Russia you always leak to the US intel agencies when you are going to invade a sovereign nation – this morning markets got a welcome surprise when just after 3am ET, Interfax reported and Russia’s Defense Ministry later confirmed that some troops are starting to return to their regular bases after completing drills. Markets welcomed the positive signals from Moscow, which included Russia’s top diplomat saying that diplomacy with the West could succeed, as US equity futures surged, bond yields were lifted and and oil, gold and other safe havens were slammed amid continued optimism that geopolitical tensions in Ukraine may be easing.

As of 715am, emini S&P futures were 1.6%, or 72 points higher, and trading at 4,464 while Nasdaq futures rose 2.2% and Dow futures were 1.2% higher. 10Y Treasury yields bounced above 2.02% after dropping as low as 1.90% yesterday after the US deep state sparked fresh groundless panic about an imminent invasion. The dollar, oil and gold tumbled while cryptos jumped. Meanwhile, iron ore tumbled as China ramped up a campaign to stop prices from overheating.

VIX futures challenged the Cycle Top with a decline to 25.82 this morning.   Additionally, it may test the 50-day Moving Average at 22.30.  The Cycles Model indicates the VIX may resume trending strength on Wednesday or Thursday.

The NYSE Hi-Lo Index closed at -462.00 yesterday.  Should it remain below -300.00, the decline is likely to resume.  I am amazed that SPX did not decline even more yesterday under these conditions.

TNX moved higher this morning, as US PPI ran hotter than expected.  The Cycles Model suggests the Master Cycle may be complete at the end of next week.  In the meantime, TNX may fall back for a very short time, before running higher (in strength) next week.

ZeroHedge remarks, “anuary saw US producer prices rise 1.0% MoM (twice the expected 0.5% jump) and is the 21st straight month of MoM rises. This sent prices up 9.7% YoY (record highs and well above the expected +9.1% YoY)…

Source: Bloomberg

Goods costs are accelerating faster than Services still with Energy and Food prices the biggest drivers…

USD futures tested support at the the 50-day Moving Average at 96.01.  It appears to be consolidating prior to another strong run-up later this week.

Crude Oil futures are down over 4% this morning and on a provisional sell signal.  The Signal is confirmed beneath the Cycle Top support at 88.96.  I had warned last week and again yesterday that the top was very near.  In fact, the reversal was late.  Yesterday was day 272.  Last week had a double dose of trending strength which delayed the reversal.

Gold is another commodity that reversed down yesterday precisely on day 258 of its Master Cycle.  Gold futures declined to a low of 1845.55 before a small bounce.  Gold ma go into a two-month decline according to the Cycles Model.

8:00 am

Good Morning!

SPX futures dipped to a weekend low of 4631.00 before bouncing back.  Some of the buying is coming from the European Markets, but the bounce may be primarily from dealers and hedge funds trying to elevate the SPX above the short gamma zone at 4400.00.  The 38.2% retracement value is 4475.49 while the 50% retracement is at 4495.72.  The mid-Cycle resistance is at 4475.76.  Today’s expiring options are predominantly short all the way to 4475.00.  Call volume is lackluster up to 4500.00.

This is a market that requires one to sell the bounce.  The current Master Cycle anticipates a low on or near March 4.  The Cycles Model currently anticipates a retracement to one of the levels mentioned above.  However, bad news may have stocks testing new lows.

ZeroHedge reports, “Having sunk near session lows ahead of the US open, futures suddenly spike higher, pulling 10Y yields and the Russian ruble alone for the ride, when comments from Russian foreign minister Sergey Lavrov who was addressing the press alongside Putin, eased investor nerves for an “imminent” – in the words of the US deep state – invasion.

Speaking across what may be the longest table in the world…”

VIX futures rose to a weekend high of 32.04 before settling back, still in positive territory.  Wednesday’s options expiration shows Max Pain at 25.00.  Long gamma kicks in at 30.00, although call buyers predominate above 25.00.

The NYSE Hi-Lo Index closed Friday at -308.00.  

ZeroHedge comments, “The panic in credit protection – SPX edition

Credit protection continues moving one way, higher. CDX IG has taken out new recent highs, while SPX remains above the lows we saw in late January. The CDX IG (inverted) vs SPX chart needs little commenting. Credit protection is priced in a rather fearful way at the moment and the “pairs” trade vs SPX looks interesting.

Source: Refinitiv

The panic in credit protection – what about VIX?

VIX is trying to catch up to CDX IG, but VIX is still below the late January levels (although it is up 10% in early Monday trading). Both credit and equity protection are now pricing in a lot of fear. Unless you believe in a full blown world war and Fed hikes killing the economy, protection here is getting expensive.

NDX futures made a weekend low of 14039.50 before bouncing back.  It is deep in short gamma territory and may have difficulty pulling itself out of the hole.  Short gamma begins at 14100.00.  An inability to climb above that level condemns the NDX to a possible limit down day very soon.  True capitulation in a Wave (3) or (C) may only happen after multiple limit down days.

ZeroHedge advises, “With many expecting/hoping for the usual ‘walk-back’ by St,Louis Fed’s Jim Bullard this morning – after unleashing some chaos with his reality check on inflation fighting last week – his interview with CNBC this morning did anything but, rather reiterating the need for quick aggressive action to raise rates and his efforts to persuade the rest of the committee of the need to act decisively and soon.

• *BULLARD: FED MUST REASSURE PEOPLE IT WILL DEFEND INFLATION TGT
• *BULLARD: INITIAL RATE HIKES, BAL-SHEET RUNOFF RELATIVELY CHEAP
• *BULLARD: HAVE BEEN PUSHING CMTE TO MOVE FASTER SINCE SUMMER
• *BULLARD: COULD HAVE MOVED ASSET BUYS UP FASTER IN RETROSPECT
• *BULLARD: I’M A LITTLE MORE WORRIED WE’RE NOT MOVING FAST ENOUGH
• *BULLARD: HAVE A LONG WAYS TO GO IF WE WANT TO BE RESTRICTIVE
• *BULLARD: WOULD WANT TO START PASSIVE BAL-SHEET RUNOFF IN 2Q

Stocks sank back after the rebound on Russia comments…

ZeroHedge further observes, “I’ve got a feeling that a limit down capitulation style morning is still on its way, as I first asserted about a week ago – here’s why.

Last week’s CPI number coming in at 7.5% ratchets up the temperature not only for the Fed to not change course, but also to act sooner and more decisively.

As I have written about, inflation is the kryptonite that won’t let the Fed off the hook easy anymore. There can’t be anymore Powell pivot, because the inflation numbers absolutely have to be addressed.

Make no mistake about it, the Fed has stuck their foot into the shit. The days of inflation being a “mystery” that somehow magically fixes itself are over.

We are in a situation unlike any situation we have been in over the last 25 years.

TNX pulled back this morning, but not to new lows.  Instead, it appears to be riding the uptrend pretty aggressively.  The Current Master Cycle ends in the last week of February, so there are another two weeks to possibly reach the Cup with Handle target shown in the chart.

USD futures have reached a weekend high of 96.34 and is on a buy signal above the 50-day Moving Average at 96.01.  The new Master Cycle appears to have another six weeks to completion with the 61.8% Fibonacci level at 98.30.  As a Primary Wave [2], it may reach 100.00 in that time period.

Gold has ben bid to 1869.55 over the weekend, but it is fast approaching the completion of its Master Cycle.  Today is day 258 of its current Master Cycle.  Those who are long should consider consider hedging/taking profits.  Tomorrow may be the last possible day of strength in this rally.

West Texas Intermediate Crude hit a Friday high at 94.66 and may have completed its Master Cycle on day 262.  The weekend high in the futures hit 93.62, so it appears that oil may be pulling back.  A decline beneath the Cycle Top support at 88.56 may give an aggressive sell signal.

ZeroHedge reports, “A bout of profit-taking ensued last week as seven-year highs in crude oil and middle distillates prices intensified concerns about inflation and the possibility of countermeasures from central banks.

Rapidly escalating prices for oil and other commodities have become a central problem for macroeconomic policymakers in advanced economies. Unless inflation in oil and other commodities starts to decelerate on its own, the U.S. Federal Reserve and other central banks will be forced to raise interest rates to slow growth and bring prices back under control.”

7:30 am

Tomorrow I am leaving to consult on another business and will be away for the remainder of the week.  I plan to return next Monday to resume the blog.

Good Morning!

SPX futures drifted in a tight range between 4479.90 and 4512.30 over the weekend after retracing 61.8% pf Thursday’s decline on Friday.  The Cycles Model suggests we may have entered a panic Cycle that may last through early March.  Should that occur, the 1987 trendline at 4000.00 may be broken.  Most analysts view fair market value at or near 4000.00 at 20 times earnings.  However, that is a relative valuation, since anything over 4000.00 may be considered to be a Super Cycle throw-over .  The 51.5-year Cycle shows valuations in 1932 and 1974 at 3.5-3.7 times earnings.

Today’s options expiration show expiring puts outweigh calls below 4520.00 with probable short gamma beginning beneath 4500.00.  4450.00 may be the point of no return.

ZeroHedge reports, “U.S. index futures swung around in a volatile, illiquid overnight session, and at last check were flat despite traders’ concerns about growing fireworks in the European bond market where Italian and Greek bond plunged amid fears of ECB rate hikes as soon as October, while waiting for Thursday’s key CPI data and further corporate earnings. S&P 500 futures were up 2 points or 0.05%, Nasdaq futures were up 26 points or 0.18% and Dow futures were up fractionally as markets now expect more than five quarter-point Federal Reserve interest-rate hikes in 2022 to keep inflation on check following a strong U.S. jobs report. Treasury yields and the dollar were stable, while the euro snapped a six-day strengthening run. WTI crude fell after last week’s rally. Chinese shares climbed on their return from a weeklong holiday. Bitcoin extended its recovery surge.”

VIX futures are higher, but have not yet broken out of Friday’s trading range.  As of Friday, they are on a buy signal and may remain so through mid-March.  In Wednesday’s options expiration, calls prevail above 22.00 and gamma turns positive at 25.00.

The NYSE Hi-Lo Index closed Friday on a sell signal at -198.00 after readings above 0.00 on Tuesday and Wednesday.

NDX futures are positive, having reached a weekend high at 14772.20.  However, the 200-day Moving Average is at 15030.20.  There is nothing positive about this chart, especially going into a panic Cycle through mid-March.

ZeroHedge remarks, “If you’re a fan of American football, this year’s playoffs were some of the best in the sport’s history. The last six contests were all decided by the narrowest of margins, often at the last second. It was a good reminder that you need to stay until the end.

I mention this because between lunchtime on Wednesday January 24 and this past Wednesday, there was a distinct feeling of ‘we made it’. Yes, inflation has surprised to the upside. Yes, key data were weak. Yes, central banks are pivoting more hawkishly. Yes, yields are rising. Yet, thanks to good earnings and fund inflows, global equities are only down 3%. Well done.

It’s tempting to think that this is the end of the story: the test arrived early this year,and the markets passed. But the reality is likely to be more complicated. This is just the start of the game. A record amount of stimulus is about to be withdrawn from the global economy. It begins.

Part of the withdrawal will come through monetary policy. That shift has two parts: reversing the lowest policy rates in history, and reversing the largest central bank bond purchases in history. You know, simple stuff. From May 2022 to May 2023, Morgan Stanley economists expect G4 central bank balance sheets to shrink by US$2 trillion, four times the largest 12-month decline ever, from 2018-19.”

TNX is taking a pause this morning after a blow-out performance on Friday.  The Cycles Model call for rising rates through the month of February.  The next resistance lies at 19.71, the November 2019 high.

ZeroHedge observes, “Average hourly earnings ran at a +9.2% annualized pace in Friday’s employment report,” said the Oracle. “On a three-month annualized pace, wages grew +7.0%,” he said, alone in the desert.

“For those hoping that the US will avoid a wage-price spiral, this report was no quaalude.” But the past was not what I’d called to explore. Of all my sources, only the Oracle foresaw 7% inflation back in early 2021. And my hope was to glimpse what the future holds.

“This year’s path is hazier with the Fed now in play. But it is difficult to see inflation below 7% for this year, and it is within the range of reasonable outcomes to see 10%.”

Special Report

I thought I’d share my views on the Cycles as they appear on the SPX chart.  The actual Cycles are within a week or two of the depictions.  You can see that all the Cycles are divisible by 4.3.  I have only mapped out the Cycles since the year 2000.  Prior to that, Cycles appears in approximate 17.2-year periods. 1932, 1948, 1965. 1982 and 2000 appear to be pivotal points along the way.  Prior to that, from the peak in 1929 to the trough in 1932 was 34.4 months.  I am seriously debating whether the new decline may last 2.58 years (31 months) to September 2024 or 34.4 months to December 2024.  Considering the presidential election in 2024, I wonder whether the market decline may not run itself out until the latter date.

1:55 pm

SPX is approaching its 50% retracement value at 4623.00.  Expiring options favor calls over 4500.00.  Options are sort beneath 4450.00.  This may be a “sell the rally” event today if it cannot hold above 4500.00..

ZeroHedge comments, “As we detailed last night, yesterday’s BoE and ECB did not disappoint still-surging global ‘Hawks’, who continue steering future policy-rate pricing into levels which Nomura’s Charlie McElligott notes just a week ago would have been perceived as an impossibility and into “overshoot” territory, as it pertains to lif-off progressions which would jolt financial conditions “tighter” (ECB implieds in particular, where they now price the deposit rate to rise to zero by YE)… but, when mkt expectations are provided so explicitly, with such vigor, and inflation is over-target, with (energy) commodity prices still surging – these CBs will simply have to comply with what the market is giving them at this juncture.”

8:00 am

Good Morning!

SPX futures bounced to an overnight high of 4536.20, a 50% retracement, before easing back down to a flat profile.  The market awaits the monthly BLS jobs survey at 8:30 am.

As for today’s options expiration, gamma is positive above 4500.00.  While options favor puts at the current level, gamma goes  short below 4450.00 and seriously so beneath 4400.00.

ZeroHedge reports, “We warned last night that the surge in futures following the huge bounce in Amazon stock wouldn’t last (simply because a closer read of the company’s earnings left a lot to be desired) and sure enough, in the overnight (extremely illiquid) session, 500 futures erased gains of as much as 1.3% to trade 0.1% lower, or 10 points, to 4,460 as European stocks extend their decline as inflation and monetary tightening outweighed earnings optimism.  Meanwhile, Nasdaq 100 futures pared much of their gains, trading just 0.5% higher after earlier rising more than 2%, one day after the index had the worst day since September 2020. The VIX increased for a third day Friday, hovering just below 26.

VIX futures rose to an overnight high at 26.12, just beneath Cycle Top resistance.  Breaking that resistance allows a further probe to the neckline.   Normally the Head & Shoulders formation offers the potential target for a Wave three, as well.

The Wednesday, February 9 options favor calls at 25.00 and above, while gamma goes long at 30.00.

8:40 am

NDX futures declined into new lows after the BLS report after rising as high at 14837.30 in the overnight session, a 50% retracement.  Gamma is short for NDX/QQQ and appears to be getting shorter.  Margin calls may also be on the agenda at 2:30 as banks call in their loans on a sinking market.

ZeroHedge observes, “All the exuberant AMZN-driven gains overnight in US equity futures have evaporated after the much-better-than-expected payrolls print sparked ‘good news is bad news’ selling pressure this morning…

And with the last big hurdle ahead of Fed hikes now lifted, bond yields are also spiking…

8:51 am

TNX broke out above previous highs as its trending strength rises.  The Cycles Model calls for three more weeks of rally to the next Master Cycle pivot.  The Cup with Handle formation has been activated and may prove to be the target for this phase of the Cycle.

ZeroHedge observes, “So much for all those hoping that January payrolls would be a huge miss (due to Omicron or not) and perhaps slow the Fed’s rate hike intentions: moments ago the BLS unleashed a two-for-one shock when it unveiled that not only did January payrolls print at a huge 467K, almost four times higher than the 125K expected (and as a reminder, Goldman expected -250K)…

… but the BLS also revised December payrolls from 199K to 510K. And there’s more: as part of the BLS’s annual revisions, November was revised from 249K to 647K. This means that the previous two months revisions were 709K higher! A quick look at the historical adjustments shows that covid may have never happened with every month rising on average about 500K!”

USD futures bounced to 95.64 this morning.  A Master Cycle low appears to be imminent (early next week).  That suggests the USD may resume its rally through mid-March.

9:50 am

SPX gapped down this morning to begin Wave (3) or (C).  The Head & Shoulders formation shows the minimum decline, which may be underway through the first week of March.  Friday’s options expiation shows the Max Pain zone near 4525.00.  Gamma turns short below 4500.00.   The 100-day Moving Average is at 4569.77.  The SPX is on a sell signal beneath that level.

ZeroHedge exclaims, “Facebook – or Meta now that it’s in the witness protection program – is making record after dismal record this morning after its catastrophic earnings and guidance last night: not only is the company’s 22% drop the biggest in its history…

… but according to Bloomberg, the one-day crash ranks as the worst in stock-market history: the Facebook crash has erased some $195 billion of its market cap. That would make it the biggest collapse in market value for any U.S. company.

9:45 am

VIX rallied above the 50-day Moving Average at 22.35 and is on a buy signal.  Yesterday’s warning of an extreme dose of strength was prophetic.

7:00 am

NDX futures have declined beneath the 200-day Moving Average at 15028.29, creating a Cyclical sell signal.  Coming up  (or down?) is a Wave (3) or (C).  Both are destructive in their intensity.  The Cycles Model suggests the decline may last through the first week of March.

I am on my way to an early appointment.  I may be back after 9:00.

11:45 am

NDX has declined beneath mid-Cycle resistance at 15131.52 and the 200-day Moving Average at 15027.90, issuing a sell signal.  QQQ is at 365.03 where options turn neutral.  Today’s expiring puts dominate beneath 364.00 and gamma turns short beneath 360.00.  This appears to be the tipping point of a probable panic Cycle.

ZeroHedge notes, “Everything ‘was‘ awesome…

But now it appears things are going just a litte bit pear-shaped (and no obvious headline driven or technical catalyst yet).

US Equity indices are rapidly erasing the overnight exuberance, with even Nasdaq’s Alphabet-driven spike fading fast. Small Caps are deep in the red and Dow is back to unchanged…

Notably The S&P and The Dow (far left and far right respectively) are clinging to their 100DMAs…

10:05 am

The GSCI Ag Index may have reached its Master Cycle high today at day 266.  The retracement may not last/may extend beyond today’s high due to a surge of strength due next week.  Things are getting out of hand with food prices and the next Master Cycle (high) is not due to mid-March.

ZeroHedge reports, “An uncontrolled fire burns at a North Carolina fertilizer plant early Wednesday as there is still a risk of an explosion, forcing thousands of people to evacuate their homes in surrounding communities, according to local news WXII-TV.

Winston Weaver Co.’s Winston-Salem plant caught fire Monday night and continues to burn days later. The plant produces ammonium nitrate and has more than 500 tons of potentially explosive chemicals in storage.

“There has been no improvement on scene, conditions have not improved,” a spokesperson for the city of Winston-Salem said during a press briefing at 0430 ET. “The potential for an explosion is still there.”

This follows a prior ZeroHedge article, “The information that I am about to share with you is extremely alarming, but I have always endeavored to never sugarcoat things for my readers.  Right now, there are shortages of certain items in grocery stores across the United States, and food supplies have gotten very tight all over the globe.  I have repeatedly warned that this is just the beginning, but I didn’t realize how dire things have already gotten until I received an email from a farming insider that I have corresponded with over the years.  I asked him if I could publicly share some of the information that he was sharing with me, and he said that would be okay as long as I kept his name out of it.

According to this farming insider, dramatically increased costs for fertilizer will make it impossible for many farmers to profitably plant corn this year.  The following is an excerpt from an email that he recently sent me…

“Things for 2022 are interesting (and scary). Input costs for things like fertilizer, liquid nitrogen and seeds are like triple and quadruple the old prices. It will not be profitable to plant this year. Let me repeat, the economics will NOT work. Our plan, is to drop about 700 acres of corn off and convert to soybeans (they use less fertilizer, and we also have chicken manure from that operation). Guess what? We are not the only ones with those plans. Already there is a shortage of soybean seeds, so we will see how that will work out. The way I see it, there will be a major grain shortage later in the year, especially with corn. I mean, we are small with that. What about these people in the midwest who have like 10,000 acres of corn? This will not be good.”

8:30 am

Good Morning!

SPX futures rose in the overnight session to 4588.20, nearing the 61.8% retracement value at 4590.00 and achieving Wave Equality between Waves [i] and [v] of Wave C at 4578.00.  Wave C may achieve 125% the value of Wave A, as well.  The Cycles Model calls for a Trading Cycle high today with 30 days to the next Master Cycle low.

Today’s expiring options may be driving this rally, forcing the dealers and hedge funds to buy high, chased by the positive gamma above 4540.00.  However, gamma turns short at 4480.00, leaving a narrow window within which they must close, or risk a bloodbath.

ZeroHedge reports, “US equity futures and global stocks from Europe to Asia were headed for the biggest four-day rally since November 2020, supercharged by blockbuster earnings AMD and Google, which hit an all time high overnight after rising 9%. As of 745am, Emini S&P futures traded at session highs, up 40 points or 0.9%…

… while Nasdaq futures were up roughly double, some 252 point to 15,247 or 1.7% higher…

… and the Dow was roughly flat. Oil fluctuated around a seven-year high as OPEC+ agreed on just a 400Kb/d increase in output, as expected to discuss increased supplies. Treasury yields, the dollar and Bitcoin were marginally lower.

VIX futures made a low of 21.19 this morning, but may be bouncing back.  Short gamma starts at 21.00 for today’s expiring options.  Max Pain is at 24.00, but gamma turns positive at 25.00.  The Cycles Model calls for a Trading Cycle low today, with (upward) trending strength immediately returning.

NDX futures rose to 15277.00 before retreating beneath 15200.00.  Wave [v] of C = Wave [i] of C at 15190.00.   Mid-Cycle resistance is at 15122.73.  A decline beneath that level triggers a sell signal.

In today’s options expiration, gamma turns negative beneath 15000.00.  In the QQQ (price: 365.52) options, gamma turns positive at 368.00 and goes short at 360.00.  Max Pain level is indeterminate.

ZeroHedge remarks, “The anatomy of short gamma

The past correction and the following squeeze has killed short gamma players. In case you missed our explanation of gamma see here. When sudden volatility kicks in, short gamma traders have to delta hedge the books as their deltas tend to rise quickly (and hit risk limits many times). One thing they don’t do is sit back and relax. When the market started puking, their long deltas exploded as they became more and more long deltas. The sudden mini rips were painful as well, as they needed to buy back sold deltas. You have to understand that short gamma traders are not “allowed” to speculate when it comes to deltas, these must be mechanically hedged. Add to it the remarking of the short options implied vols, and you understand the huge p/l pain. The chart below is the most probable hedging behavior among the aggregate short gamma dealers in NASDAQ. You understand why they have been magnifying the moves…

TNX tested its Cycle Top resistance at 18.12 this morning, then pulled back.  The Cycles Model calls for a new surge of strength by the end of the week, with three weeks to go to a new Master cycle high.

Zerohedge reports, “Just in time for the Fed’s taper and upcoming QT, which will reduce demand for US paper for the foreseeable future, in its quarterly refunding statement the Treasury cut the notional size of long-term debt as government spending slows now that Biden’s Build Back Better plan is dead.

Specifically, in its refunding statement, the U.S. Treasury announced refunding debt sales next week totaling $110BN, down from $120BN in February and, as previously noted, plans to reduce nominal coupon auction sizes across all maturities for the second straight quarter, while increasing the April 5-year TIPS auction size to $20BN. The Treasury will refund approximately $54.8 billion of privately-held Treasury notes and bonds maturing on February 15, 2022.  This issuance will raise new cash of approximately $55.2 billion. 

8:20 am

Good Morning!

SPX futures spent most of the night in pullback mode, down to 4488.40 before rising back to breakeven.  It is hovering just beneath the 50% retracement value at 4519.16 and may test it one more time this morning.  The Cycles Model suggests a possible hourly pivot before 10:00 am that may shift stocks back into decline.  Month-end rebalancing may now be over.  Despite the rally, the NYSE Hi-Lo Index closed at -92.00.

Wednesday’s options expiration show 4500.00 as the dividing line between the bulls and the bears.  The calls have it above 4500, but gamma doesn’t turn positive until 4550.00.  Meanwhile, gamma turns negative at 4480.00.

ZeroHedge reports, “World stocks began the new month on firmer ground, after a volatile January, as reassuring comments from Federal Reserve officials helped to calm rate-hike jitters even though US futures failed to extend recent gains. After closing out January with a furious two-day, dip-buying meltup thanks to a flood of inbound month-end rebalancing, US index futures briefly traded through Monday’s highs, backed by decent rally in European equities where financials outperformed, boosted by solid UBS earnings, before dipping lower as the volatility seen in past days lingered. At 7:00am ET, emini S&P futures traded 0.23%, or 10.5 points lower, Nasdaq futures were also red, some 31 points or 0.15% lower, and Dow futures dropped 0.2% as investors weighed cautious rate-hike commentary from Fed officials and awaited earnings from firms including Alphabet and General Motors. Treasuries climbed and the dollar weakened. Oil fell, but held close to seven-year highs.”

VIX futures declined to 24.40 before beginning a probable bounce this morning.  The Cycles Model calls for a very large dose of strength coming in today.  The Elliott Wave structure also calls for an upcoming Wave (iii) of 3 of (3), a very potent Wave.

NDX futures rose to 14981.00, still short of the 200-day Moving Average at 15015.00.  It remains in correction territory with  more that a 10% loss to date.  It may also attempt to move higher, to overcome the overhead resistance and escape correction territory.  However, it has met a common Wave relationship in the correction Wave (c) = Wave (a) at 14802.00.

QQQ (price: 363.05) managed to close in the Max Pain zone and may attempt to maintain that level.  However, Wednesday’s Mas Pain level is 360.00 and options turn negative at 358.00.

RealInvestmentAdvice cautions, “Market bottom? Is it in? That was the main question I got last week, and I even discussed it with Charles Payne of Fox Business. It’s the one answer everybody is searching for. Is it time to “load up the truck” for the next leg of the bull market or go to cash?

It certainly is a problem now, given that January had a rough start for the S&P 500. But, of course, such brings up the age-old Wall Street axiom “so goes January, so goes the year.”

TNX futures may have reached its correction low overnight at 17.39 and appears to have begun a bounce.   Trending strength comes back on Thursday and may  encourage a breakout later in the week.

ZeroHedge warns, “A popular hedge fund trade – known as the Treasury Basis Trade which, reminiscent of what LTCM did back in the day seeks to profit from minuscule differences between prices in the futures and cash markets for Treasuries by using massive amounts of borrowed money – is set to make a comeback as the Federal Reserve plots to shrink its footprint in the U.S. Treasury market, even though it nearly blew up the financial world in late 2019.

The strategy, which as we explained in detail most recently here, involves taking leveraged positions in Treasury notes and bonds in order to exploit price differences with the corresponding futures contracts, backfired both in Sept 2019 (leading to the repo market crisis which ushered in the Fed’s “NOT QE” phase of reserve replenishment) as well as the March 2020 liquidity crisis, when the normal relationships between cash and futures broke down completely.”

3:25 pm

SPX rose to Short-term resistance at 4490.00 and may be reversing from less than a 50% retracement.  Confirmation of the reversal coms at 4457.00 and below.  Now we know the pattern that may follow through to the end of March.

ZeroHedge comments, “One day after even traditionally bullish Goldman flow trader Scott Rubner said that “sell the rally trading mode is still in place” (although a capitulation, especially if coupled with CNBC’s “market in turmoil” would spark a fierce rally), we get a reminder that nobody knows anything when the Fed throws market for a loop and pulls the Fed Put.

Case in point, two market notes this morning, one from JPMorgan’s trading desk, another from Morgan Stanley’s chief equity strategist, Michael Wilson, which look at the exactly same data and reach two diametrically opposing conclusions.

11:25 am

Today it has become abundantly clear that this decline has taken a different shape than the 5-Wave decline that I expected.  Last Monday I had issued a warning of a mid-course correction.  That extension and the fact that it had landed on day 257 of the Master Cycle should have warned me that this decline was shaping up differently.  Not making a new low on Friday and a higher correction today was the final straw.  This decline is taking the shape of what is known as a “Leading Diagonal” which, instead of having 5-Wave impulses, consists of zig-zag declines.  The good news is that the 1-2 week correction usually runs out of steam after attaining the mid-Cycle resistance at 4457.34.  We may already be there.

ZeroHedge notes, “Over the weekend, we reported on the record amount of put-buying that was occurring in US equity markets, with Goldman traders pointing out that we have been averaging $1 Trillion worth of puts per day.

There were several days last week where put notional set records, and Goldman indicates that hedgers tended to be institutional… and mainly focused on the indices:

“Monday for example $2.2 Trillion notional traded in US options market, with 64% puts ($1.4 Trillion) further adding LP hedges and taking the street further short gamma. We have maxed out our index put notional chart.“

6:30 am

Good Morning!

I am starting the blog early due to an appointment at 8:00-9:00 am.

SPX futures are down after a weekend of upside not exceeding last week’s high at 4453.23.  The 200-day Moving Average is at 4435.04, with Friday’s close beneath it.  This is an ideal setup for a panic decline lasting 2-4 days.  Having completed 17.2 days of decline last Friday, the most likely outcome is an extension to 21.5 days,  the same length of time as the March 2020 decline.

In today’s options expiration, there is a large stack of puts and calls at 4400.00.  Max pain is most likely at 4395.00 with short gamma starting at 4375.00.  The dealers positioned themselves well at Friday’s close in the SPX, but may not be accounting for the NDX (QQQ).

ZeroHedge reports, “After a rollercoaster week that ended just barely higher following a late meltup on Friday, overnight volatile US stock futures swung to start the week, with Nasdaq 100 futures leading gains after rallying on Friday, before turning red and threatening to fizzle a global equity rally amid persistent worries over the Federal Reserve’s plan to hike interest rates this year. Emini S&P futures were down 0.5% or 21 points to 4401, after rising as high as 4437 and dropping as low as 4395 in another extremely illiquid session where China being offline for the week due to Lunar New Year did not help; Nasdaq futures were down 0.1% while Dow futures were lower 0.7%. Technology stocks led gains on the Stoxx Europe 600. Meanwhile, the dollar fell and oil rallied.”

NDX futures are positive as I write but fading, having reached a weekend high at 14559.50.  That is short of last week’s high of 14646.50 and remains bearish.  On Friday NDX concluded 21.5 days of decline.  Should the decline continue, it may extend to 25.8 days.  The target for this decline is 12208.37, the Wave (2) low of a year ago.

In today’s options expiration, NDX is squarely in short gamma territory and also has to deal with very high margin.  Calls usually begin at losses of 10% or greater.  QQQ (price: 351.80) closed right on the MAX Pain zone at 351.00.  Options turn negative at 350.00 and gamma goes short at 345.00.  Should the decline resume, the margin desks may be very busy today.

There is talk of a short squeeze, but it appears the ammo for a further squeeze may have dried up at this point.  ZeroHedge observes, “In the end it was very close, but the bullish view of Goldman’s flow trader Scott Rubner proved accurate, even if it was a nail-biter with the S&P closing just barely green on the week after tumbling on several occasions last week only to stage one remarkable recovery after another. So what does Goldman’s veteran trader think will happen this week, when with China closed for its New Year holiday,  liquidity will be even below last week’s abysmal levels? As Rubner writes in his latest weekly Tactical Flow of Funds checklist, “Equity Supply vs. Demand Imbalance continues …but improves in February.”

VIX futures had an inside weekend, bottoming at 27.92.  A rally above the neckline locks in the Head & Shoulders target.  The Cycles Model calls for a particularly strong trending pattern over the next two days.

Today’s options expiration favors the calls over 25.00, while gamma turns positive at 30.00 and above.  Should VIX rise above 30.00, the rally may be self-reinforcing.

TNX futures are rising to challenge the Cycle Top resistance at 18.03.  Should it break above it, the rally may strengthen as the week progresses.  The next major resistance is at 19.71.  Thereafter, the Cup with Handle formation may dictate the final target.  The current Master Cycle  is due to end in strength at the end of February.

1:25 pm

Index options managed to close near the Max Pain zone at the open.  Now stocks and ETFs (retail) options expire at the close with 435.00 at the Max Pain zone.  Puts dominate at 434.00 and below, with short gamma at 430.00.  There’s no telling exactly were things can go downhill, so dealers are keeping a tight rein on the process for now.  Traders are hoping that month-end pension fund rebalancing ma pull the market out of its sticky wicket.  Unfortunately, Monday’s options expiration is even more loaded for bear than today’s.

This may be playing out similarly to the crash of 1987.  Will history repeat…or rhyme?

11:15 am

SPX continues to defend 4350.00 against further encroachment from the bears, but market momentum is turning against it.  The NYSE Hi-Lo Index is now at -267.00, hardly bullish.  Despite the apparent “success” of this defense, the dealers and hedge funds may have simply postponed the inevitable capitulation and may have turned it into a panic.

Note:  Stocks rallied into the 17.2-day pivot at 11:30 am, where I had originally proposed a Cycle low.  Instead, the pivot tells us to expect up to 4.3 days of decline from here.  Crash helmets required beyond this point…

ZeroHedge advises, “Arguably due to rising recession risks, rate-hike expectations are fading modestly this morning…

And that – it would appear – is all that anxious dip-buyers needed as they ripped stocks higher from an ugly overnight session. Nasdaq is now up 2% after being down 1%…

The ramp has lifted The Dow back to unchanged on the week…

ZeroHedge remarks, “This is not a Friday brimming with positive developments, to put it mildly. However, at time of writing Asian stocks were following US futures higher on what looks to my jaded eye to be nothing more than a good key earnings report. Here’s a Friday thought: perhaps we should dump all our chattering economic data and burbling/shilling financial reporting and just have the earnings and share price of one firm as a proxy for everything everywhere, the apotheosis of the agglomeration that globalized financial capitalism drives: but why am I even saying “perhaps” when one reads all the rest of the news that apparently doesn’t matter?”

8:15 am

Good Morning!

SPX futures have declined to 4274.90 thus far in the final series of declines, the first potentially to the Cycle Bottom at 4096.21, then the last potentially to 4000.00 as the final capitulation occurs.  We will attempt to monitor the progress of he decline during the day as the bottom may come as early as 11:am, depending on how well the dealers can defend the Max Pain zone at 4385.00.  Today’s expiring options are short beneath 4350.00 with short gamma at 4300.00 and below.

The NYSE Hi-Lo Index closed at -393.00 after trading modestly positive at 6.00.

ZeroHedge reports, ” If you thought that yesterday’s blowout, record earnings from Apple would be enough to put in at least a brief bottom to stocks and stop the ongoing collapse in risk assets, we have some bad news for you: after staging a feeble bounce overnight, S&P futures erased earlier gains as traders ignored the solid results from Apple and instead focused on the risk of higher interest rates hurting economic growth.  Contracts in S&P 500 dropped as negative sentiment continued to prevail, while Nasdaq 100 futures erased earlier gains after strong Apple earnings. As of 730am, Emini futures were down 48 points or 1.12% to 4,269, Dow futures were down 335 points or 0.99% and Nasdaq futs were down 77 or 0.6%. The dollar was set for a fifth straight day of gains, the longest streak since November, 19Y TSY yields were up 3bps to 1.83%, gold and bitcoin both dropped.”

VIX futures are climbing, but still inside yesterday’s range with a high of 32.82.  In Wednesday’s options expiration, calls dominate at 25.00 and above, with positive gamma at 27.00 and higher.  Despite Wall Street’s effort to keep a lid on the VIX, bad news may propel it to 50.00 or 60.00 in a heartbeat.  Today and Monday are days of trending strength for the VIX.  The only thing I can attribute to this is some outside event that jolts the market.

Bloomberg argues, “Seven straight jumps in the so-called “fear gauge” for the S&P 500 is a signal that it may be time to wager against volatility, if history is any guide.

Only 10 times in the past two decades has the Cboe Volatility Index — better known as the VIX — risen for that many trading sessions in a row. Investors who shorted the gauge after the previous nine streaks of that length would have earned a return of nearly 19% after 20 days, according to data compiled by Bloomberg.”

TNX futures hit a high of 18.54 this morning before settling back above the Cycle Top at 18.04.    Trending strength returns next week as it may stage a potential breakout to new heights.

ZeroHedge observes, “Analysts expected a mixed picture from income and spending data in December (with spending expected to drop and incomes rise – an odd pairing during the Christmas month) and they were right with incomes rising 0.3% MoM (slightly less than expected) but spending tumbling 0.6% MoM (meeting expectations). That is the first drop in spending since Feb 2021…

USD futures pulled back today after breaking out above the November high.  The Cycles Modle points out next week showing high trending strength, while the next Master Cycle appears to be due in the second week of February.  The potential target remains at 98.30.

ZeroHedge reports, “Relatively little talk about the dollar given the latest explosion higher. The mid January shake out has turned into a brutal squeeze, catching many by surprise. DXY is approaching the first big resistance here and RSI is very overbought, but as we all know, overbought can stay overbought for a long time…Second chart shows the last shake out in positioning.”

“

Source: Refinitiv

West Texas Crude made a possible Master Cycle high yesterday on day 254.  The chances are good that the Master Cycle may extend into next week.  A new high in crude simultaneously with a new high in the VIX appears intriguing.

OilPrice observes, ”

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The GSCI Ag Index had its Master Cycle high on Tuesday on day 258.  Usually there is a one-to-three week correction before moving higher.  All things considered, should it not go beneath the 50-day Moving Average at 400.30, we may see a possibly short and shallow correction before moving considerably higher.

ZeroHedge observes, “This was supposed to be the year that things “got back to normal”, but here we are at the end of January and things have only gotten worse.

As we move forward into February and beyond, there are two key global shortages that we are going to want to keep a very close eye on.

One of them is the rapidly growing fertilizer shortage.  A few days ago, the Wall Street Journal ominously warned that “high fertilizer prices are weighing on farmers across the developing world”…”

Gold futures are making new lows as I write.  This decline may continue until mid-February, when the next Master Cycle (low) is due.  It is on a sell signal as of yesterday.