Turnaround Tuesday?Extreme Edition
Today’s Spotlight Market
While the equity markets were in a corrective mode, VIX futures came back into the spotlight, with the lead-month September futures nearly doubling in just 4 trading days. Also of note was the move of the VIX term structure from a contango, where front month futures trade at a discount to more deferred months to a backwardation, in which the nearby months trade at a premium to more deferred months. Currently, the market is in a backwardation out to the December 2015 futures, with more deferred months seeing a nearly flat to modest contango out through April 2016.
Fundamentals
The old trading adage regarding so called ?Turnaround Tuesday?s? really became apparent this week as markets from Equities to Bonds to Currencies initially reversed course following the huge moves seen on Monday, only to give back the gains by the close on Tuesday. Overnight, the Peoples Bank of China (PBOC) announced that it was lowering interest rates by 0.25% as a signal that the PBOC was prepared to address the needs of the economy. In addition, bank-reserve requirements were lowered by 0.5% in order to hopefully increase the opportunity for bank lending. While Asian equity markets posted heavy losses on Tuesday, the ?turnaround? started in Europe and continued into the U.S. trading session initially erasing a good portion of the losses seen on Monday. Selling pressure moved towards markets that posted sharp gains on Monday, such as U.S. Treasuries, Japanese Yen and Eurocurrency, in a reversal of the move into so called ?safe-haven? assets. While one could argue that the steep price declines seen on Monday were excessive, it was more apparent that the U.S. equity market was losing momentum with prices merely threading water for most of the year. While the bursting of the Chinese equity ?bubble? and the recent devaluation of the Chinese Yuan were cited as major factors for the recent market turmoil, a look at the chart for the E-mini S&P futures shows that the sell-off may have been more technical in nature once key support levels failed to hold. At that point it appears that liquidation selling took hold with momentum based traders adding to the selling pressure. The average displayed size of the bid and offer on the E-mini S&P also decreased dramatically on Monday, which made it much more difficult to move trades in ?size,? causing prices to move in points on orders that would normally move the market a few ticks. While it is anyone?s guess on how long this volatility will last, it certainly appears that the summer trading doldrums will not occur this year.
Technical Notes? -? View Today’s Chart
Sometimes when price volatility spikes, it is good to take a longer term view of the market to get a better assessment of the overall trend. So this morning we are looking at the monthly continuation chart for the E-mini S&P futures, we notice that the up-trend line drawn from the major low made back in March 2009 has not yet been tested, despite the steep price sell-off seen so far this month. In fact, we are still about 100 points, as of this writing, above the October 14 low of 1813.00 which is the next major support level seen on the monthly chart. The 14-month RSI is reading a very neutral 51.11, despite the steep sell-off seen this month. Upside resistance for the front month future remains at the May 2015 high of 2134.00.
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