Scott Burrill - Market Notes

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Scott's notes
Scott's Market Notes

Looking for a Bottom

Mar 16, 2020

My thoughts are with you. I hope everyone is faring well and doing whatever it takes. We will get through this together.

Our firm is open and we are ensuring we meet the needs of our clients -- reach out if you need us. Moreover, unless otherwise directed, our critical NYSE Floor presence will be fully operational. Lastly, our technology, despite the incredible volumes, and tick and quote messages, handled last week very well.

As I type this, futures are lock-limit down following another emergency rate cut, to zero, a new quantitative easing program, and the shutting down of portions of our economy. We have family in Italy, and the recent zeitgeist personally hit home after chatting with a relative last Wednesday morning. President Trump's speech that evening where he proclaimed we have to "get used to doing things differently" drove the shift home.

Now what?

Markets are okay with anything as long as you can put a price tag on it. That doesn't mean we will like the new value, but it eventually works itself out, and we adapt. We have been through this in 1987, 1998, 2000, 2001, 2003, 2008, 2009, and so on. We must put a price tag on the indisputable fact that we are likely in a recession, the old playbook of corporate share repurchases keeping a bid under the market is over, and that credit lines and cash flows remain flowing. For all the criticism Chair Jay Powell has received, he is doing his part. It's time for massive fiscal stimulus.

Let's use our tools to plan for this week.

For the week, the S&P 500 Option Implied Move is + / - 226 points or 77% implied volatility with a range of 2937 to 2484.

The daily, weekly, and monthly trends are, of course, down.

The news flow coming out of Washington over the next few days takes precedence to the usual Economic Releases and FOMC Meeting. Also, we have the quarterly futures, options, and options on futures expiry this week. Monitoring dealer positioning and open interest in deep in the money put options will provide insight as to whether dynamic hedging is supportive of longs or shorts, contributing to the wild price swoons.

Notably, VIX closed at 57.83, and VVIX (volatility of VIX) closed at 171.28, and the volatility curve is in extreme backwardation (risk higher now than in the future). The only true hedge has been cash or VIX relative to the S&P 500 Index. The VIX curve has steepened, and the shape has shifted.

Looking forward and diving into Friday's rapid recovery, I created a scan of potential "bounce stocks" that were markedly favored, on average, based on a variety of quantitative and fundamental factors. Should we stabilize, volatility revert, these are the types of issues that can be forward-looking guides.

Updated Index Levels.

Take care, and we are here to serve you.


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