Saturday, March 21, 2020

When you can no longer hedge risk

Do you understand the gravity of what happened on Friday?

Do you see what I see?

With the quad-witch opex Friday, a great mass of financial insurance just came off the table.  The market bounced off resistance mid-session, and sold hard into the close.

The $SPY made new crash lows in after-hours trading.

Here is the problem.  With a sustained sky-high $VIX, hedge funds and other players are no longer able to hedge long positions in the markets.  Say you are a fund with 1 million shares of $SPY, optimistic for the long-term growth and progress of the America, but worried about the risks posed by an uncertain event, like Brexit or a "trade deal" negotiation.

With volatility at normal levels, with $VIX below 20, you can always buy put options to insure the value of your holdings against an unexpected drop in prices.  If you're clever enough, you might even cash out your puts green, rolling them into buying the dip on the indexes to make even greater returns, because the market, after all, she only goes up.

The $VIX is now pegged above 60, spreads are blown out, and put options as portfolio insurance are no longer possible -- with any duration, they are outrageously expensive.  The existing risk models and approaches no longer work.

March options have now expired.  You cannot insure your positions.  But you can sell them.

The S&P 500 closed at 2304.92 Friday.  If the /ES futures are limit down Sunday night, then we have the following circuit-breaker bands for Monday:

  1. 7% - 2143 SPX, 15-minute pause
  2. 13% - 2005 SPX, 15-minute pause
  3. 20% - 1843 SPX, all markets closed for the day
A rare level 3 circuit-breaker crash is very much on the table for Monday.

The nearest clear technical support would be 1810 on the S&P, reached at the open on Tuesday.  This is a no-brainer for all players, which will rally us back to channel resistance -- now under the topping megaphone -- into the end of the month.  I believe that algorithmic trading systems will buy an 1810 low.

A final drop into early April returns us back to the area of the 2007 (year) highs, recognized as critical and truly ominous by everyone.

S&P 500 hourly zig-zag crash to 520

A sharp relief rally on the lunar cycle can then take us back to overhead resistance from the original move and base channel off the top.  We may see a slowing of the Chinese virus throughout the world, a leveling off of new cases and casualties, maybe even the welcome news of effective treatments for it.  These are good things, yes, but this pause and rally is just the eye of the storm.

We then meet the C-wave of the decline, as the economic impact of the virus arrives, like the second half of a hurricane beyond the eye-wall.  Now we get the mass-layoffs, destroyed earnings, collateral damage (on actual collateral) in real estate, commercial and residential, as well as all of the consequences from that.

The long-long term channel support for the markets is at about 520 on the S&P 500, which we could see as early as the June FOMC meeting.  This level also is the trendline between the 2002 and 2009 market lows.  The Fed will go full Bernanke helicopter-money on this one, maybe they can print up $50K or even $100K per American household.  The Federal quarantine shutdown bonus coming soon is a trial run of this mechanism.

long-long-term S&P 500 chart

We should know on Sunday night.  Good luck to friendlies.


If we get a dump tomorrow that is comparable to the dive to 2854 in wave 1, then maybe we visit 1940 on the S&P 500 tomorrow.  Congress is bickering about fiscal stimulus package details, so the equity markets may help them resolve their differences.  This would trigger 2 halts tomorrow.

capitulation selling to end each leg down


christiangustafson said...

I do hope T.Berry is ok in all of this. I include him (her?) in my own prayers each night.

Randall Beehomes said...

I believe he identifies as a her but yes. He called me terrible names and now hes ruined. But I forgive him. Because that's what Christians do.

umdengineer said...

I think we will see all hands on deck Monday. Whatever it takes for the Fed.

CG, how are things in Seattle? Michigan is starting to get hit hard.
15 intubations in one night at Beaumont.

christiangustafson said...

I live on the north end of Seattle, and my local Safeway still has food -- even pasta and sauce. The frozen food section has been hit pretty hard, so I was able to purchase fruit last night for family smoothies this morning.

I'm WFH and getting used to it. I actually like the ritual of my commute, riding the bus downtown, having my coffee, arriving at the office. But I'm stuck inside now with schoolkids and it's getting a little squirrelly. I go for walks at night to get some fresh air and to clear my mind.

One thing I notice during the day is that the local hummingbirds make daily patrols of the siding on the house, looking for spiders to plunder and eat. They are systematic and ruthless.

The specs at Weekend Wall Street have the DJIA already projected 700 points lower, as of Saturday afternoon.

Randall Beehomes said...

If you aren't armed by now you might as well give up.

christiangustafson said...

Just ordered dinner from Windy City Pie on Phinney Ridge -- carry-out.

They have Chicago deep-dish nailed.

ik said...

CG, were you a Lou Malnati guy back in Chicago? I liked their sauce but not their crust. Truth be told, I thought Windy City Pizza in San Mateo CA was better ( I know, heresy ).

christiangustafson said...

Lou's is great, but I grew up on Uno's and Due and spent the 90's living up in here, so that's where I tended to go. They didn't deliver then, but the trick was to order take-out, walk past the hordes of tourists to the kitchen, grab your pie, and walk out.

Giordano's makes a nice pie, as does Edwardo's, and I won't pass on Ranalli's or even Pizano's.

Windy City Pie here in Seattle bases their style largely on the Pequod on Clybourn. The carmelized crust is amazing.

Alex said...

No chance for a megaphone bounce at 2100?

Alex said...

Something like this maybe?


Kevin said...

Christian, I think we should see the bottom of wave 3 early this week, if we haven't seen it already. A crash is possible, though Rut 2 has already done that, so maybe we bounce. I'm watching this guy's wave count closely.

christiangustafson said...

The megaphone bottom near 2100 might hold us.

I just projected W1 all the way out as support and had W3 reach it early this week at 1810. But it makes for an historic Black Monday event, doesn't it.

christiangustafson said...

The first wave ended in a panic dump to 2854 SPX.

Simple proportionality between the two waves suggests that 1940 could be within range for tomorrow.

We would trigger level 1 and 2 market stops, not the 20% full halt.

Seems reasonable, no?

christiangustafson said...

Have you boys seen this yet?

umdengineer said...

Futures limit down again.

Kevin said...

Buy the dip for a trade.

Kevin said...

Target SP 2700. Then re-short for the big one.

Carl Lee said...

Why is 1810 the clearest technical support? Great blog

christiangustafson said...

1810 was the last great epic low. 666 is an important level, too.

Lines on a chart, price histories, channels. Maybe the real support is a fibo retrace. Maybe there is no support.

We do this work because we think there must be some sort of order in the mess, reason in History.

YMMV, good luck, Carl.

Ken Smith said...

Fed: We'll buy everything.

Market: Meh. What else ya got?

umdengineer said...

Looks like things are slowing down just a little... but we'll see if I need to edit this post.

christiangustafson said...

W3 could be in. They have truly thrown the kitchen sink at this.

umdengineer said...

CG correct me if I'm wrong but according to EW this is now W4 today (corrective)? If this goes up another 1000 points won't it invalidate W1?

christiangustafson said...

Current wave count, puts in c of an irregular 4. Another +200 on the S&P tomorrow would be fine, with all of the excitement and nice free things coming from Congress.

End of W3 on this count is almost precisely 1.6 times the 539 pt W1 off the top.

Having the world reserve currency means we get to do this sort of thing, until we don't and can't.

umdengineer said...

I see, so we have some margin on the Dow and S&P. If they can bid the S&P up about 400 points then they would invalidate W1.

The question is whether they try to break through that immediately or let it bounce back to 2500 (S&P).

Alternatively they could go for an inverse head and shoulders pattern. That would mean a down day tomorrow and then they pick it back up.

I think they are familiar with EW theory and as you said all the other technical indicators. They are going to try to invalidate any downward trend pattern that could develop.

If the virus case count starts to decelerate then they have the impetus to rally.

This person says we should know in a few days (virus case count):