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Monday, February 5, 2018

Daily update 2/5 Did SPY options cause the mini crash?

Bigger splat.

SPX smashed through the 50 SMA and traded almost down to the 100.  It closed down on the year wiping out all of January's big gain.  There were huge inflows in Jan. and those people are all underwater now.  This was the second day in a row with over 90% of the volume in down stocks.  The only other time that happened while SPX was above the 200 DMA in the last 10 years was June 19-20 2013 (during the infamous taper tantrum).  That low was the start of the mysterious 100 DMA bounces we saw over the next 2 years.  QE was still in force.  We have a different situation now.  The FED is in a rate hike cycle and also doing QT.  The market might not react quite the same this time.

The futures plunged even more after the 4 PM close.  They are now showing up a good bit, but this is still about 20 points below the market close.  Tthey went below 2600 before they closed for the day.  So we have a big bounce off the low, but still well below where they closed.  I have no idea where they will be by morning.

The red count shot up to 95%.  It has not been that high since Feb. 2016.

Here is another look at the SPY option data.

There is a huge number of puts and calls at the 273 strike.  This morning SPY opened a bit above 273 and immediately rallied.  The trouble began when that rally fizzled out.  When SPY fell back through 273 it accelerated to the down as delta hedging kicked in.  That caused SPY to fall through the 50 DMA probably triggering some stops.  That sent SPY down through 270 which was another strike with a lot of puts.  That started more delta hedging.  Throw in a little panic and SPY went down through two more strikes (266 and 265) with a lot of puts.  More hedging and more panic.  There are a bunch of puts at 260, 256, and 255 which could also cause problems should SPY drop below those levels.   

The VIX was up to 37 intraday which was the highest it has been since Aug. 2015.  It is extremely rare to see this kind of selling above the 200 DMA.  The TRIN closed over 3 today so unlike yesterday there was some panic selling.  That is usually good for a bounce the next day.  However, this big of a sell off is probably going to cause the rest of the world to be down in the morning.  That may put a damper on buying enthusiasm.  I believe this was purely a technical sell off.  That normally would reverse itself in a reasonable period of time.  However, there could be a problem with margin calls.  I have no way of knowing if there are a bunch of funds in trouble now or not.  Maybe they will talk about that on CNBC tomorrow if that is the case.  I have talked about the leverage over and over in this blog.  That is because an unwind is extremely difficult to predict, but very detrimental to long portfolios.  In Daily update 4/5 What Could Possibly Go Wrong? I wrote:

"As I mentioned a while back I have had a nagging feeling this market would start going down one day without a warning and just keep on going.  That could be happening right here right now and I have no way of knowing if that is the case.  On the other hand, this could be just another garden variety pullback that races to new highs and beyond.  Quite the dilemma."

That was from last April, but it applies equally here.  This could be a blip or the start of something much larger and I have no way of knowing.  We might not be at a short term low in price yet, but with such negative internals a bounce should not be too far off in time.  We will have to see how the market responds to getting a right hook upside the head.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.