The Witching Hour
Via Michael Naso of FBN Securities,
The October Double Witch lit the match that precipitated the bulk of the 8.6% slide in the S&P 500 from its September highs. Massive and unexplainable changes in open interest for the futures most of that week as well as an unusually large Market On Open imbalance for index expiration that morning hinted that the final days of the rally were artificial and susceptible for a sharp reversal. This hypothesis proved prescient by 10:30 AM and the subsequent four weeks.
We have arrived at the third Friday in November licking our wounds after a precipitous drop in equities since the Election. Typically, I rate expiry as a nonevent and surmise that today will be no different. Reminded of last month’s inflection point, traders, however, who have far better memories than given credit for, may expect something out of the ordinary especially with the curious drop in the VIX over the past several days albeit I chalk up this suppression of implied volatility to the selling of $6B in notional SPY puts centered on the 140-41 strikes. On the other hand, one could easily argue that the critical 1350 level for S&P 500 options held up the market yesterday such that the removal of such a protective barrier could reengage the aggressive selling from the past two weeks.
My average monthly NYSE closing TICK stubbornly holds just above deeply oversold levels to prevent me from calling a bottom for the moment. Complicating matters for the bull case is the muddying of the economic data which has acted as the best tailwind for shares since the enactment of QE3. Based on the Katrina precedent, Jobless Claims should remain elevated until Christmas at which time the seasonal adjustments, which render the data useless even under normal circumstances, will make the series largely ineffective as a predictor until February. Similarly, as the Philly Fed indicated yesterday, the subjective surveys likely will reverse their positive trends obtained from the prior months as well.
We do receive the Capacity Utilization figures today, the most consistent growth indicator on the calendar. The statistics will have yet to absorb most of the effects from Hurricane Sandy such that it will confirm or refute the supposed strength suggested by other manufacturing readings from October. I expect this number as well as other objective reports, most scheduled for release in December, to downtick with concerns over the fiscal cliff. While this morning’s headline is therefore admittedly stale, it offers a good read on the health of the recovery ahead of these predicted turbulent and uncertain days.
Finally, similar to investors paring down risk whenever President Obama opens his mouth, the prior three sessions have produced an intraday top at 2PM.
Recognition of such a pattern will insert a big boulder into the path of any positive inertia as countless numbers of day traders will continue to press shares, ETFs and the E-Minis lower until they get run over by large institutions aggressively putting money to work with a late day buy program. Although my most reliable sentiment statistic has yet to fall to a point that merits my calling for a reversal, stocks do not need to drop much further to introduce enough fear into the market that clears the way for a breathtaking move to the upside to spawn newly discovered momentum.