Scott Burrill - Market Notes

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Scott's notes
Scott's Market Notes

Are We There Yet?

Oct 28, 2018

Good Afternoon:

One question I'm being asked is whether the correction is over.

I don't know, nor does anyone else.

Like I used to tell my 3 kids when we headed off in our Sequoia to explore the Indian Peaks Wilderness near our home in Boulder, we are getting close and it's going to be great when we get there.

We can only look to the weight of the evidence and try and gauge certain possibilities.

These past few weeks have afforded many trading opportunities, yet markets still have yet to feel the fear.

The SP500 Index 30 days out only has an implied volatility of 23.6%. VIX closed at 24.2 and its volatility (VVIX) closed at 110.5. While high and historical volatility of late is eclipsing implied volatility, the markets are handling this correction incredibly well and efficiently. The fact we are able to provide reasonably accurate empirical levels like we are, points to the efficiency of the current market environment.

No doubt though, as I wrote last week, we are in corrective territory, where decisions must be made as to portfolio positioning going into year-end and beyond.

Structural quakes have emerged that point to regime change. In fact on Friday, we closed below the 2017 closing price in the SP500.

We observe this of course in high frequency price data, but other forward looking themes must be considered.

Momentum has shifted. We are in a downtrending market across the board except in defensive sectors.


While Earnings and Economic Reports are generally exceeding expectations, concern about forward growth is weighing on price as assets are rotated away from past winners

We are unwinding the Federal Reserve Balance Sheet. While rates may possibly get jawboned lower by Trump or the Fed may halt its higher rate trajectory if an immediate crisis emerges; there is no mistaking the change in trend from past easy Federal Reserve Monetary Policy.

We have likely hit peak Buyback.

Buybacks have been a formidable bid to the marketplace. Buybacks now equate to more than 3% of market cap. Clearly, their absence has been felt during the quiet period of this most recent earnings cycle. But, as corporate debts continue to rise relative to GDP and if corporate debt costs increase, it will be harder for firms to continue to repurchase shares.

Shifting gears, tactically this is once again a week with highly impactful catalysts ranging from Earnings Reports to key Economic Releases.

Importantly, Apple (AAPL) reports earnings and guidance after the close on November 1st. The current option implied move is 5%. This is a potential major catalyst to indices and market sentiment as well since it has been relatively unscathed during the recent market correction.

The SP500 Weekly Option Implied Move is + / - 90 points. Unlikely, but still worth considering is doubling that value for a possible move of + / - 180 points.

The Weekly Magnets have failed to provide support the past few weeks. We will look for immediate breach to the upside toward 2700.

Intelligent Order Flow was balanced on Friday, and top actively traded instruments were primarily in the TMT Sector.

Attached are both 30-Minute and Daily Computed Levels.

30-Minute

Daily

All the best,

Scott

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