MACRO BACKDROP:
Welcome back, readers. Domestic equities markets have been posting negative closes nearly all month. Losses have appeared broad and wide across nearly all sectors. Selling has been rampant, obviously. In the underlying S& P 500, defensive sectors appear to be the only sectors with gains as scared money may have found a place to hide, in my view. With the return of “normal” volatility levels has come back. As of the morning of 10/29, index futures seem implied to open on up ticks. Looking at the VIX, the run upwards from the low teens to the early twenties, according to some sources, has been a long time coming. Trade negotiations with China have appeared, lethargic, at best. The clashing of opinions regarding the Federal Reserve’s rate hike activities, the potential catching up of inflation, and the difference in opinions coming out of the White house regarding a myriad of topics has seemed to have spooked many investors and institutions into selling off the US markets. November elections are days away. European markets, on the morning of 10/29, have some interesting news to react to, regarding Angela Merkel of Germany leaving her position as head of the Christian Democrats. This aside, a rally in the US dollar has appeared to cause some trouble for gold futures this morning. In my view, a lot of the noise in underlying equities has only presented hedgers & speculators with short term gap risk, but not much more than that. I believe, fundamentals on US economic health are still intact, confident investors & traders (I believe) may be bargain shopping right now and I think the underlying stock market can regain some footing and head back into September’s ranges, if not higher. Being too eager on that, however, can get you squeezed. With this much pulling & pushing in geopolitical and economic outlook, where’s some opportunity to find good trade setups that acknowledge market risk? Let’s look to the indices.
INDICES:
US 10 YEAR – The US 10 Year rate currently sits at 3.096%. The Dec. US 10 Year T Note futures appear to be trading on a down tick from 10/26.
ESZ18 – Dec. S& P 500 e-mini contracts appear to face further downward selling pressure, plunging into the 2620’s this past Friday session. Dec. contracts are being bid up this morning, on 10/29. One of my sources, as of 10/26, has indicated that many of the index companies that have now reported earnings have shown some strong figures. Earnings growth has topped more than 20% for the 3rd straight quarter, negative guidance from companies appears to be shown lower than the 5 year average and valuations appear lower than the 5 year average P/E. I suggest having an eye for this contract to catch a bid into a quiet rally as contrarian investors go bargain shopping. Buying some option premium could be useful to hedge in this contract at a key level I’m eyeing, if you can handle the geopolitical, monetary and headline risk we’ve had so far.
NQZ18 – December NASDAQ contracts show a similar set up, in my view. 7000 is being flirted with this morning. There’s been much condemnation coming down on tech companies, and managed money seems to have exited the space temporarily, according to the commitment of traders report as of 10/23. With a chart that mimics the S&P 500, it appears that contract sellers are in control for now. That said, I feel that the market will be waiting for lots of underlying companies to bottom out. So my bias is long in the Dec. contract, but I’d be keen on straddling the market until a turn becomes apparent.
YMZ18 – Looking at the commitment of traders as of 10/23, the bias is long in Dec. Dow futures. It broke down through 24,500 last week, and is flirting with 25,000 as of 10/29 morning. It is my contention, however, that this contract is subject to a large amount of gap risk due to headlines and the whim of a single presidential tweet. The selling pressure is still on, and in my opinion, the macro events of November that traders have been waiting for, from US midterms to the EU – UK summit, will keep volatility loud in the background. So I see an opportunity to utilize some strategies that may provide some play on particular ranges, such as a long iron condor, with risk and reward caps.
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: [email protected] or my direct line: (312) 957-8079.