Scott Burrill - Market Notes

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Scott's notes
Scott's Market Notes

Hanging On by Two Ticks

Mar 18, 2020

Good Afternoon:

I hope everyone is faring well during these unprecedented times.

I want to reiterate our firm is open for business, and we are here to service you, our trusted clients. Out of prudence, we have instituted portions of our business continuity plan. Our technology is well-designed and is functioning perfectly. Our critical NYSE Floor is staffed and servicing clients. Unless otherwise directed, this vital market role will remain fully operational.

Overnight, index futures traded limit down. We gleaned insight as to the actual opening from the SPY ETF, which is not subject to the same trading constraints and observed a low of 2350 but not quite the Tier 2 lockdown of 7%.

I was encouraged that the S&P 500 E-Mini Future touched, fell below by two ticks, and immediately repelled off of a critical level of 2343.75. We look at forecast levels in instruments to prepare for the market to trade towards or away from them. This is the expected behavior. We have a level, a target which is 2422 to 2500, and a failure point, 2265.

As I type this, markets are once again selling off along with most Treasuries, and VIX remains elevated. The volatility curve remains in extreme backwardation (higher risk now than in the future), and the curve has shifted, and the volatility of VIX (VVIX) remains extremely elevated at 170. With VIX and VVIX this high, we will not signal the all-clear until VVIX is below 110 for several weeks. Certainly, tradable Bear Market rallies can cause this along with positioning.

Recall, the S&P 500 Weekly Implied low is 2484. Barring further breakdown, that is still highly probable to close within this week.

The market will be highly sensitive to details regarding any details and actions from Congress on the Fiscal response to the virus. Since our analog is Italy, expect the news headlines to get worse before it gets better. The market will already be ahead of those headlines.

With 95% of the S&P 1500 trading below the midpoint of their Bollinger Band, and 45% below two standard deviation bands, is a bounce imminent? We expect Bear Market rallies; however, with looming options expiry, negative dealer gamma, many are already planning a rebound. Quarterly index rebalancing is postponed, and corporate share repurchase programs, if not paused, will be entering the quarterly earnings reporting black-out period imminently. The hoped-for-bid under this market is likely absent. Our best-case scenario is a trading range to trade from, and volatility to retract.

Looking through a quantamental screen of securities which may outperform the S&P 500, will serve as market tells. These fared well yesterday, and many names are repeats from my weekend note.

Below, we observe active retail flow along with our informed liquidity ratio, which displays buying or selling pressure. I like to scan this for retail sentiment.

Updated Index and Crude Oil Levels.

We are here to serve you.

All the best,

Scott

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