March 14, 2019
Update: As mentioned, Quadruple Witching day occurs tomorrow. Erik Lytikainen was kind enough to allow us to share his most recent model and its projections. Of note, S&P 500 and Crude Oil futures have options expiring tomorrow.
Based on Erik’s work the S&P could fall 45 points and crude oil over 2 dollars by tomorrow’s close. Erik’s model is based on the current price and the price need to achieve a neutral delta and gamma for the given options on the securities. Of the two Crude Oil is most interesting as Erik’s final price magnet has proven nearly perfect over the last six months. Click on the chart to enlarge it.
The China/US trade agreement is now being delayed. A scheduled meeting between XI and Trump will not happen in March and may not occur in April. The futures markets gave up overnight gains on the news.
In January we noted that credit creation surged in China. Credit data released for February were not nearly as impressive and lead us to believe that the one time surge was an effort to boost economic activity to advance trade talks. Economic data was little affected by the surge in credit as most Chinese economic data continues to be weak.
Tomorrow is a Quadruple Witching day, meaning that four sets of stocks options expire. The four include: stock index futures, stock index options, stock options and single stock options. Frequently, as we have shared with Erik Lytikainen’s reports, these day can be volatile. Given where the market sits, as discussed in the next paragraph, we suspect tomorrow could be a roller coaster kind of day.
As shown in the graph below, the S&P is pushing right into strong resistance. A move higher is likely bullish, but given the weakening macroeconomic outlook and political volatility (China trade, BREXIT, Mueller, etc. ) could also be a false breakout. The beige level below represents a Maginot line of sorts- stay long above it and be careful below it. We remind you that the market likes to extract the most pain possible at turning points. A 25-50 point run higher above the resistance line would get the shorts long, and the longs longer, setting up a painful point to turn lower.