CBOE

The key question now is “Can the U.S./global economy handle a meaningful downturn in financial asset prices?” The short answer is that it may not have a choice. The Federal Reserve has done what it can to juice the American economy and has the balance sheet to prove it. Central banks, for all their power, do not control long term capital allocation or corporate hiring practices.  Fed Funds have been below 2% for six years.  If the U.S. economy can’t continue to grow in 2015 as the Federal Reserve inches rates higher, there are clearly larger issues at play.  And those private sector problems will need private sector solutions. 

Sometimes, when you go looking for trouble... you find it!

It appears Rule 575 is having an impact today. Quietly this morning, CBOE traders were told at 1027ET that the S&P 500 index was "currently unavailable for trading." As the following chart shows, this halted a drop in the market and instantly enabled a levitation to near the day's highs. Unrigged?

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• China Inflation Softens to Four-Month Low (WSJ)
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With the Alibaba roadshow kicking off this week, ConvergEx's Nick Colas reviews the second-order implications of this historic transaction. Over the next two weeks investors will have to consider important issues, such as which stocks money managers will sell to fund their BABA purchase and what securities (stocks and ETFs) hedge funds may short to pair against an Alibaba long position. And consider: "Do big IPOs signal a market top?" Also, with an estimated $7 billion in fresh cash and a valuable public stock post-IPO, BABA will also be able to play the M&A game aggressively. Just consider its corporate North Star: "Our mission is to make it easy to do business anywhere" (the first line of the S-1 summary). In short, Colas concludes Alibaba really is a big deal (at 27.3x trailing EV/EBITDA).

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• Libya's Islamist Militias Claim Control of Tripoli (WSJ)

It’s time to think like a contrarian. Why? Because capital markets seem as bulletproof as one of those up-armored military personnel carriers you see in war zones. So what could really rattle stock, bond and commodity markets over the next 3-6 months? The go-to answer, steeped in history, is geopolitical crisis, where the logical hedges are precious metals, volatility plays, and possibly crude oil. Look deeper, however, and other answers emerge.

The last six months have not run according to anyone’s plan.  Who would have thought that equity market structure would yield a best-selling book, after all?  As ConvergEx's Nick Colas notes, on the fundamental side of things, interest rates across the developed world are lower, not higher – counter to the consensus view just 180 days ago. Mutual fund investors first bought U.S. equities earlier in the year, then in the last 6 weeks have begun to liquidate in earnest. Exchange Traded Fund investors are buying more fixed income products than those dedicated to U.S. stocks. Large cap stocks are trouncing small caps in terms of performance. And as for volatility – well, Elvis has clearly left the building on that one. So which of these surprises has staying power into the back half of 2014?

Before there was VIX, there was VXO (or "old" VIX) based on OEX calls and puts and trading all the way back to 1985. Because it covers the 1987 crash period, traders often use it as a more consistent gauge. While attention is focused on VIX being 'near' record lows; VXO has just broken below the crucial 9% level that has only been breached once before and has hit a record low. As Citi warns, this suggests that we are very close to if not at the cycle low (for volatility) - though as we noted yesterday, it is unclear if this is a 'good' low (melt-up in stocks) or 'bad' low (crash).

"Good" economic news and "stronger than expected" earnings reports have apparently buoyed the market against the drain of liquidity from the Federal Reserve. Today, the market ripped higher at the open as hopes of a "QE" program from the ECB rippled through the markets. Despite commentary from the mainstream media that the markets are doing great, the updated chart below shows the markets continuing its tug-o-war between support and resistance. This is an important point to remember. While it is certainly possible that the markets could ratchet higher from here due to the "psychological momentum" that currently exists, the likelihood of a runaway bull market from here is remote.

Thanks to the miracle of VIX slamming, USDJPY-stop-running, CBOE breaking, US equity market opening, "we're not worried about no stinking Ukraine civil war or Chinese economic collapse", low volume levitation, stocks knee-jerked off early dumping lows to recover comfortably into the green today. Not everything was exuberant though (as Trannies and the Russell 2000 ended red - bouncing once again off its 200DMA). Gold gained almost 1% today (back over $1310) for its best 2-days since January. The USD closed unch (with notable weakness in SEK). USDJPY ranged down below 102 and rammed stops to lead the charge higher in stocks (even with Japan closed for 2 days). Stocks tracked JPY but benefitted from a dead-cat-bounce in Treasury yields. VIX closed higher on the day (unable to regain the late-slam from Friday). AAPL regains $600 and Biotechs bounced 4.5% - so everything's fixed.

Whocoulda seen that coming? A market that rips 1% low to high at the open as VIX's late-day collapse on Friday is smashed higher and then ripper lower results in... CBOE breaking!!

*CBOE SAYS SOME COMPLEX RATIO ORDERS MAY NOT EXECUTE (only HFT uses complex orders)
*CBOE: DUE TO C2 ISSUE, GOLG8 (Google Options) CURRENTLY UNAVAILABLE FOR TRADING

Welcome to the unrigged markets...

... The HFTs are providing so much liquidity they are literally making it rain.

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U.S. stocks are like a duck, floating on a quiet pond – calm above the surface, but lots of furious churning invisible to the naked eye.  The S&P 500 looks like it will end the first quarter within a hair of the 1848 level where it started the year, but that doesn’t mean everything else is all stasis and light.  Today we offer up a quick ‘Top 10’ list of surprises from the last 90 days.  Gold, for example, is back from the grave, up 7.3%.  So is an imperial Russia, with the biggest land grab since the building of the Berlin Wall.  Mutual fund flows are ahead of exchange traded funds by a factor of 5:1.  And most of those ETF inflows are into bond funds, not the “Great Rotation” we all expected into stocks.  The 10-year U.S. Treasury yields all of 2.67%, and bonds have bested U.S. stocks consistently in 2014.  First quarter 2014 may not have been a long trip, but it certainly has been strange.