Morning Note: What Has Traders Fretting Right Here?

So, while that “coiled” feel in the SP500 60-minute chart that we explored in yesterday’s video (shot early in the session) appeared prescient later in the day, suffice to say that, while the bounce resumed in early overnight trading (with S&P futures up another 1+%) — upon the fears, followed by the facts, of foreign central banks hiking their own benchmark rates (Swiss Nat’l Bank for the first time in 11 years) — well, let’s just say that the spring snapped overnight. As I type the S&P is looking to give back nearly all of yesterday’s gain at the open (in 45 minutes).   I’ll of course wait till the open before penning part 2 (the opening numbers)…

With regard to that pending mechanical buying on the part of options dealers, here’s from yesterday’s note:

“…as we’ve been reporting, there are a mountain of put contracts about to expire — (contracts that dealers had to hedge by shorting the underlying securities) — that ultimately resolves in some not-small short-covering on the part of options dealers.

With regard to that mechanical short-covering just mentioned, it’ll likely ramp up today should the Fed deliver something market-friendly. If, however, the Fed disappoints equity investors, it gets pushed out potentially as far as next Tuesday’s sessions (Monday’s a holiday).

One would think that that short-covering alone would spark one of those massive bear market rallies, and it very well may, but nothing’s assured in markets — a wave of overwhelming selling could indeed emerge to absorb the buying…”

Well, in that the mass of puts due to expire tomorrow remain a burden (heavier this morning) on their sellers, the second paragraph above looks to explain any support that phenomenon may bring to the market. And while it’s probably safe to say short-term traders who understand this dynamic still have an edge, they need to pay heed to that third paragraph as well…

And, keep in mind, my next sentence from yesterday: 

“In either event, our work still says lower lows before this all plays out… Good news is, it’ll all eventually play out…”

With regard to the not-small overnight reaction to the moves of foreign central banks, I suspect that what traders are seriously fretting over is tomorrow’s Bank of Japan meeting. 

Bloomberg strategist Simon Flint does a nice job this morning outlining that dynamic:

“…global bonds might sell off more than Japanese bonds if BOJ makes an incremental policy change on Friday — potentially leading to a rise in USD/JPY, or a slump in global stocks, and increased global volatility.

The mechanism is as follows:
  • The BOJ will probably move by a small amount, wary of the macro impact of a large change. Let’s say it moves the 10Y YCC target 25bps higher…
  • Markets would smell blood, expecting this to be the first of a series of moves. The BOJ won’t be able to credibly use forward-guidance to promise that this is a one-off adjustment. Plenty of traders have lived to regret taking signals from central banks at face value — think Powell’s May pledge that 75bps was off the table, or RBA’s YCC capitulation
  • However, markets won’t be able to express this expectation through JGBs — below 10-years anyway — and so they will sell liquid G10 bonds, or pay swaps to hedge or speculate on future BOJ moves

The Japanese government bond market is ~14.5% of the global markets according to BIS. While it may be less integrated into global portfolios than this size suggested, it’s a free market, while China’s, almost equal in size, isn’t.

The risks to this view are that:
  • A move by BOJ is already somewhat priced-in to global markets
  • The US is so large that spillovers are necessarily limited
  • Onshore Japanese investors, knowing that domestic rates are very likely headed higher, sharply increase their demand for foreign bonds”


Suffice to say folks, at least for the time being, heightened volatility (in both directions) is here to stay…


Asian equities struggled overnight, with 9 of the 16 markets we track closing lower.

Europe is down across the board this morning, with all the bourses we follow in the red as I type.

US stocks are a mess to start the session: Dow down 659 points (2.15%), SP500 down 2.53%, SP500 Equal Weight down 2.51%, Nasdaq 100 down 3.02%, Nasdaq Comp down 2.78%, Russell 2000 down 2.61%.

The VIX sits at 31.86, up 7.56%.

Oil futures are down 1.42%, gold’s down 0.02%, silver’s down 0.05%, copper futures are down 1.75% and the ag complex (DBA) is up 0.60%.

The 10-year treasury is down (yield up) and the dollar is down 0.57%.

Among our 38 core positions (excluding options hedges, cash and short-term bond ETF), only 1 — ag futures — is in the green so far this morning. The losers are being led lower by Dutch Bros, Sweden equities, semiconductors, energy stocks and Albemarle.

I concur with the great one:

“That is about all I have learned—to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience.”

–Jesse Livermore


Have a great day!
Marty

P.s. While a day like today’s shaping up to be often warrants more than one blog post, it’ll be crickets from me the rest of today (unless I pop in later tonight). I’ll have to ask my 5-year old grandson 💝👦 what he was thinking (beat the crowds for sure) when he scheduled his waterpark birthday party the day before one of the biggest options expiration days on record and, not to mention, the day before a very important Bank of Japan meeting…    Of course I wouldn’t have it any other way 😎


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