Scott Burrill - Market Notes

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Scott's notes
Scott's Market Notes

Levels for Thursday

Oct 25, 2018

Markets have yet to feel the fear with the Volatility Index (VIX) at 25.23 and its volatility (VVIX) at 118.58 despite the near 5% sell-off in the Nasdaq 100.

Today started out to be a typical, downward biased trading day, but then it got wild. I haven't seen a margin call like this afternoon's in quite some time.

As you can see from the chart below, the Nasdaq 100 Index Future got hammered, down nearly 5%. Much of the extreme selling came in the last hour of trading.

Futures trade on margin and according to Bloomberg, the Initial Margin requirement is $7,150 per contact. This margin controls the NDX 100 Index which is currently valued at $137,200 per contract. Brokers also set margin requirements. A common value is $7,700 per contract. The value of a 1 point move is $20.

With the index selling off hard, risk managers likely looked at the net change in the contract and made a margin call for longs holding contracts. The Initial Margin / Point Value equates to roughly a net change of 357 to 385 points. You must meet that call or be liquidated when the index closes down there.

Once again, the Utilities Sector was the lone standout according to breadth.

Notably, 89% of the SP1500 are below the mid-Bollinger Band.

It's getting ugly out there. The SP1500 Index is -10% from its 52 Week High, the SP500 Index is -9.7% from its 52 Week High, the Nasdaq 100 Index is -11.8% from its 52 Week High, and the Russell 2000 Index is -15.7% from its 52 Week High.

With today's sell-off, we have eclipsed common garden-variety corrections of -8% and threaten Bear Market territory, at least in the Russell 2000.

Pouring through SP500 historical data, some rules of thumb emerge we can lean on. 77% of the time a correction is -8%. These can happen anytime and we are safe since the market usually turns around from those; that is, the market is referred to as resilient. After that, we then have an 11% chance it will be between -8 to -12%. Once we hit a -10% correction, it's time to act since the probability for deeper corrections exists and we've had nearly 20 greater than 20% corrections since the mid-1950's.

So, what now in this heightened volatile environment?

Barring the margin flush we saw this afternoon; catalysts remain in the form of Economic Releases, the ECB, and then 3Q GDP on Friday, as well as the usual geopolitical risks.

Additionally, the largest day of Earnings Releases of the quarter is tomorrow with ~351 companies reporting. Facebook (FB), Alphabet (GOOGL), and Amazon (AMZN) all report after the close. Below, I am posting the option implied moves for each. Amazon alone has an implied move of + / - 8.5%. Clearly, volatility has not subsided and they can obviously have a material impact in both the Nasdaq 100 and SP500.

Amazon

Alphabet

Facebook

Was that the selling flush? No-one knows. Quantitatively, Levels provide analytical risk confluence zones. The next major one is near 2626 apart from 2675-2682, and then near 2734. I expect us to ping Level to Level. The first order of business is to get back into the weekly option implied lower bound since we've been trading efficiently within those bounds most of the year. That is above 2700. The Weekly Magnets seem far off, but no doubt, the catalysts exist for a significant rally.

30-minute Computed Levels

All the best,

Scott

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