MACRO BACKDROP:
Finally dropping my comments for this week, I say Happy October 19th to all of my readers. Today marks the 31st anniversary of the dreadful events of Black Monday. Despite this, as of 10:45 a.m. CST, U.S. markets look to be anything but “dreadful,” trading upwards a bit less than 50 basis points in the underlying S&P 500 & NASADAQ, perhaps on the back of earnings strength for some companies. To pick at recent weakness, however, someone I use to work with once said that, “when markets get scared, they tend to pursue a flight to safety.” I truly like and admire this statement. To me, I think it sums up the psychology behind general fear in the market, anticipation, and, ultimately, the feverish intent of investors when selloffs and steeper falls occur. For the past couple of weeks, it seems like capital left the equities markets and went looking for some of that safety. The problem, however, in my opinion, is what happens when there is, virtually, nowhere to flee? Currency risk still has many suspicious of EM, trading relationship with China still raises questions, issues with the EU and country-specific risk seem to turn off many investors in that region, bonds and notes seem under pressure with rates going higher, and money managers’ lack of consensus on “buying the dip” just appears confusing. In my opinion, I see these factors as simply indicative of some fear & uncertainty, but not panic. And if that idea holds true, regarding general fear & uncertainty, then how is this market environment really any different than trading at any other time? To me, it’s not different. Therefore, traders, let’s proceed with uncertainty and scope some opportunities in the index futures, shall we?
INDICES:
US 10 YEAR – The yield sits at about 3.194% as of 11:30 a.m. CST on 10/19. Steadily, the 2 year has also edged up slightly this morning, sitting at 2.908%.
ESZ18 – What a wild ride it’s been for the underlying equities the last 9 or 10 trading sessions. Market volatility seemed to return to more “normal” levels. As of 11:42 a.m. on 10/19, December e-mini S&P 500 futures sit around 2770. The move down has seemed like everyone has forgotten about the fundamental strength of the economy, progress on trade, and the strength of corporate balance sheets. With spikes in the VIX to now holding the 20’s, having broken out from the low teens, it appears to me that selling pressure is still in play. For now, it looks like that bearish pressure, combined with earnings calls in the near term, make for range bound upside & downside, to me. For that, my view would be to constrict one’s trades and play short vol for now. Further out, perhaps as we enter the holiday season near mid- November, I see opportunity to break out of the 70-80 point range I’m looking at and get long vol. To know what levels I’m targeting and set some risk reward parameters with options, feel free to reach out.
NQZ18 – December NASDAQ futures appear to be trading pretty flatly, as of noon on 10/19. In the underlying market, some top names were trading well off of their highs for the session. In my view, some of the recent dirt throwing against the top names in the index has been more for show than reflective as actual sentiment. The December contract appears to be hovering underneath the 7200 level. I see some further volatility in the near term as many speculators have appeared to be punishing these tech stocks one moment and praising their bottom line activities the next. With global trade for these components still in the background, overall, I prefer to be long volatility in this contract, but a mix of approaches is welcomed. To discuss some potential strategies, find my contact info below.
YMZ18 – I withhold my comments on positioning for Dow Industrial futures for now, but there are some thoughts regarding what the commitment of traders report seems to be saying. I’d like to hear your thoughts as well.
Overall folks, it’s going to be a very interesting period to trade index futures. But as I tend to comment, why take sides when we can be ready for both the bulls and further mauling from the bears?
Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
For questions, comments or deeper conversation regarding these insights or to talk more specific trade ideas, please reach me via email: bsears@walshtrading.com or my direct line: (312) 957-8079.