Cumulative ticks: +17,000 after trending higher the whole day
A/D: 1421 for the NYSE and 882 for the NAS. After starting in negative territory, both trended higher the entire day and finished near the highs.
Breadth: approx 70% positive for NYSE and 60% for NAS. Again both rallied from the lows early in the session (80% & 60% negative) to finish at or near the highs.
SPX front month 10 delta put skew: 156% (19.98/12.8) - March 154% (21/13.63)
SPX front month 10 delta call skew: 88% (11.4/12.97) - March 85% (10.66/12.5)
SPX Horizontal skew or Front month versus next month: 12.89% (average of Feb ATM options) versus 13.06% (average of March ATM options).
VIX: 15.69 (-0.4)SPY volume: Finished 30% below the 30 day median average.
Quant Predictions
1-3 days: Conflicting studies here. Bullish based on seasonality but weakness based on pattern.
1-4 weeks: Bullish
3-6 months: Bullish
Well Friday was a good example of a trending day. The futures gapped lower on the open but that was pretty much the lows of the session as they all trended higher for the remainder of the day. Even though the gaps were fairly large and the probabilities I use for gap fill were low (ie the historical probabilities showed that there was a good chance the down gaps would not fill), the bullish pervasiveness prevailed yet again. Possibly on the Egypt news, consumer confidence or plain old POMO. I was inclined to fade the gap fill again but was away from my trading computer so did not trade at all on Friday. Good thing as I would have been run over. It's interesting to note from the above numbers that the vertical skew in the SPX has steepened from the day before. This is probably from the fact that ATM implieds have come in (moved up the curve) with the VIX falling to 15.69. Term structure or horizontal skew is pretty tight for Feb/Mar and not too bad for Mar/April so time spreads might not be such a bad trade for the income traders. Given that next week is OpEx I will probably start quoting the March options as front month to see what the vertical skew is to see whether normal flys are any good to trade (ie prefer flat skew for normal flys).
On the quant side, all the seasonals point to a strong start to the week followed by weakness on the Thu/Fri before the President's day holiday. So overall I'm inclined to buy any weakness on the Monday/Tuesday and exit perhaps on Wednesday. Market is overbought here so tight stops would be preferred. The bulls do have POMO on their side though and one look at the schedule below from the New York Fed shows that there is an abundance of liquidity been injected into the system for the next 4 weeks. Perhaps this is the source of the pervasive bullishness??
http://www.newyorkfed.org/markets/tot_operation_schedule.html
Looking further out beyond Feb and we do have the Irish elections coming up. It would appear that the opposition are set to take over and they have already mentioned the possibility of renegotiating the bailout agreement with the EU so that senior bondholders will take a hair cut on the debt currently owed. If this comes to fruition then it might set the cat amongst the pigeons. Clearly the Market has not priced this in but will have to do so if and when it becomes a reality (as it always does) (Feb 25th is the date of the elections so keep that in mind). Any pullback or meaningful correction in US equity markets arising from this should be bought if all the longer term quant studies especially from the current tape action are to be believed. Fundamentally money fleeing from Europe will make it's way to US equity markets just to the fact that the US is the strongest in relative terms of all the global economies (with most fund managers believing this to be so). This will continue to be helped with the fact that the US Fed will probably keep to it's loose monetary stance the longest as well (inflation measures are still benign in the US but they are showing up everywhere but - interesting isn't it??). Emerging markets are not faring as well (just look at their charts) and so I expect money to flow back from here to US equities as well. Supporting this is that the dollar seems to have bottomed somewhat and so have UST's. I expect both of these assets to trade sideways to up from here.
Quant Predictions
1-3 days: Conflicting studies here. Bullish based on seasonality but weakness based on pattern.
1-4 weeks: Bullish
3-6 months: Bullish
Well Friday was a good example of a trending day. The futures gapped lower on the open but that was pretty much the lows of the session as they all trended higher for the remainder of the day. Even though the gaps were fairly large and the probabilities I use for gap fill were low (ie the historical probabilities showed that there was a good chance the down gaps would not fill), the bullish pervasiveness prevailed yet again. Possibly on the Egypt news, consumer confidence or plain old POMO. I was inclined to fade the gap fill again but was away from my trading computer so did not trade at all on Friday. Good thing as I would have been run over. It's interesting to note from the above numbers that the vertical skew in the SPX has steepened from the day before. This is probably from the fact that ATM implieds have come in (moved up the curve) with the VIX falling to 15.69. Term structure or horizontal skew is pretty tight for Feb/Mar and not too bad for Mar/April so time spreads might not be such a bad trade for the income traders. Given that next week is OpEx I will probably start quoting the March options as front month to see what the vertical skew is to see whether normal flys are any good to trade (ie prefer flat skew for normal flys).
On the quant side, all the seasonals point to a strong start to the week followed by weakness on the Thu/Fri before the President's day holiday. So overall I'm inclined to buy any weakness on the Monday/Tuesday and exit perhaps on Wednesday. Market is overbought here so tight stops would be preferred. The bulls do have POMO on their side though and one look at the schedule below from the New York Fed shows that there is an abundance of liquidity been injected into the system for the next 4 weeks. Perhaps this is the source of the pervasive bullishness??
http://www.newyorkfed.org/markets/tot_operation_schedule.html
Looking further out beyond Feb and we do have the Irish elections coming up. It would appear that the opposition are set to take over and they have already mentioned the possibility of renegotiating the bailout agreement with the EU so that senior bondholders will take a hair cut on the debt currently owed. If this comes to fruition then it might set the cat amongst the pigeons. Clearly the Market has not priced this in but will have to do so if and when it becomes a reality (as it always does) (Feb 25th is the date of the elections so keep that in mind). Any pullback or meaningful correction in US equity markets arising from this should be bought if all the longer term quant studies especially from the current tape action are to be believed. Fundamentally money fleeing from Europe will make it's way to US equity markets just to the fact that the US is the strongest in relative terms of all the global economies (with most fund managers believing this to be so). This will continue to be helped with the fact that the US Fed will probably keep to it's loose monetary stance the longest as well (inflation measures are still benign in the US but they are showing up everywhere but - interesting isn't it??). Emerging markets are not faring as well (just look at their charts) and so I expect money to flow back from here to US equities as well. Supporting this is that the dollar seems to have bottomed somewhat and so have UST's. I expect both of these assets to trade sideways to up from here.
MC thanks for the forecast, I appreciate your commentary.
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