Finally... some selling and a bit of volatility.
Currently the S&P 500 is off 40 points to 2140, with the Nasdaq down about 2 percent and the Russell 2000 off 2.4 percent. We blasted through the first level of support at 2150 and get the first 1 percent move in the SPX in more than 40 days of trading. We are back to levels last seen in early July and coming up quickly to our next levels of support.
The VIX is up 30 percent to 16.28, which would mark the highest close since June. Keep in mind that it is also coming on a Friday, where the weekend effect – market markets pricing in the weekend time decay to the SPX options – will also have a depressing effect on the VIX. The VXST is up 55 percent to 17.11.
The beginning of the week looked like more of the same – no volatility and no range. The SPX didn’t travel more than 7 points from last week’s close. So today’s action feels extreme.
Coming into the week, our traders were mixed on their outlook for the S&P 500 given the bullish action last Friday into the long weekend. Tuesday and Wednesday played into the hands of the bulls, with the Nasdaq 100 hitting new all-time highs.
Neil was commenting this morning that the pullback was “long overdue” but not all that significant until the break of 2141.5. That happened and now he is looking for support at 2120 and then 2080 (he helpfully points out that these are in the September “U” contract not the soon front month December “Z” contract).
Tony was doing a victory lap this morning after his Monday call of “I am obnoxiously bearish”.
Eric is bearish, “looking for a test of the July breakout”.
Chris had called on Monday that a break of 2160 could get us down to 2117.
Raghee too was short the ES “on the catalyst of an iPhone letdown and am reeling that trade in before the weekend”.
We know that volatility can’t stay low forever, and it is certainly picking up today. The key with this move is the potential kick-backs for institutions and their strategies. This article ( http://blogs.barrons.com/focusonfunds/2016/09/07/jp-morgans-top-quant-even-a-tiny-bit-of-volatility-could-unleash-100b-cascade-of-selling/ ) in Barron’s was timely on Wednesday, commenting on how a little volatility would unleash a lot of selling. That has to do with how heavily invested in equities many of the systematic strategies are, including risk-parity funds and CTAs. There was also record shorts in the VIX futures, which would need to be covered with this move.
It has also been shown that volatility tends to beget more volatility. So we don’t know what next week will bring, but it may well bring some real action back to the market!
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This article was written by Simpler Trading's Editor-in-Chief, Chris McKhann
Chris McKhann has been involved professionally with the stock market for more than 15 years and specifically with derivatives for 12 of those. He started as a stock broker, but quickly moved on to options and futures trading. He spent some time as the Derivatives Product Manager for TD Ameritrade. He was the chief analyst and hedging strategist for OptionMonster. He has been an options trading educator and content provider for many years. His writing and analysis has been featured on Reuters, the Wall Street Journal, Forbes, TheStreet, CNBC and internationally. He has also designed and traded option and futures strategies for prop trading firms and hedge funds as well as managed accounts.