I think it was clear from my commentary today that I was on high alert for a turn. The post mortem is that there was still a hangover from Friday’s options expiration at the open today. The number of LEAP options (Long-Term Equity) expiring was the second-highest in history on Friday.
I won’t bore you with the technicals, but there was still delta hedging in the futures market at the open today. As there was no attempt to fade the gap higher, it was clear that sellers were firmly in control of the tape. Market Makers were still selling futures to neutralize their portfolio deltas from Friday.
After plunging more than 4%, stocks staged a furious rally, the likes of which have been seen only on a handful of occasions, before closing green. Putting today’s historic reversal in context, this was only the sixth time since 1988 that the Nasdaq reversed a 4%+ intraday drop to close higher. The other days were 10/28/97, 10/26/00, 7/15/02, 10/10/08, and 11/13/08. As for the S&P, this was the biggest intraday comeback since November 2008, when the US was in the middle of the biggest financial crisis in recent history.
The Founders Group covered the short position from Friday when the market was down about 3%. Simultaneously, I sent out an alert to subscribers that it was advisable to close any short positions.
As soon as the European markets closed mid-morning, some of the more aggressive sectors, such as the IWM (small company stocks) and the DIA (Dow Industrials), began to show relative strength into the final stages of the plunge. Then there was a divergence on the advance/decline line and downticks by about noon EST. This behavior typically leads a low – so the Founders Group picked up a couple of call debit spreads.
Then a colossal put seller (betting the market was bottoming) came into the market and triggered the short-covering rally (see the blue line in the chart from SpotGamma below). Was it the Fed Plunge Protection team? We will never know for sure, but I suspect it was.
The Founders Group then picked up a futures contract on the first slight dip after the low, but a bit higher than we paid for the calls. I closed out the futures contract right before the close and am still holding the call debit spreads overnight. I put out the trades to subscribers from my phone – though the communication was a bit unpolished. The new phone app will be available to subscribers starting Monday from Pro Trading Room.
As to swing trades, the Navigator Algo flashed an “E” exhaustion signal, along with a “Trend Reversal Imminent” signal on the system panel (see below). These signals eventually led to a preliminary buy signal and green arrow at the close. But I would like to see some follow-through (and perhaps an upward break of the Algo line) before issuing a Navigator Algo swing buy. I was encouraged by many good setups as I scanned through the major stocks and sectors tonight.
I have a couple of short videos coming out tomorrow with additional detail. Here are the sectors today in order of return, so you can see where the money flowed:
Since a lot of this was short-covering, I am not sure this tells us too much about future fund flows quite yet. We need to watch leadership in any follow-through rally for additional clues (if we get the follow-through). Value stocks are likely to lead growth stocks for a bit longer, but we shall see. The offense sectors did lead defense today, a preliminary change.
At best, we may have an oversold bounce to monitor for continuation into the rest of the week. We also need to get past the Fed meeting Wednesday and some leading tech stocks reporting earnings later this week.
If this is a bear, we will likely recover only half of the total decline from December before we roll into another leg down. Even before that, we may still need to retest today’s low in the next week before traders and money managers have the confidence to buy in earnest.
The Weekly Expected Move high sits around 4489 on the S&P 500 Futures and 448.84 on the SPY, which may cap gains for the rest of the week.
Of course, we may wake up to more consternation tomorrow, but it is less likely after such a strong comeback and reversal. And then there is Russia and Ukraine.
Strap in, and I will keep you posted.
A.F. Thornton