Hey Traders,
After a week of Disney (Ticker: DIS) here in Pit Report, it’s time to take a step back and look at the big picture.
And it is something to behold.
On the week, the S&P 500 closed down 29 points, but you would not know it based on what happened with option volatility.
VIX closed the week up over a point … and VIX futures rallied even harder.
VIX touched 17.87 on Feb. 2. In eight days it has rallied more than three points.
Something is brewing for the market.
I’m going to break down what could be heading our way and what it means for your trading …
I might even drop a trade.
Read on!
The Key Chart
To understand what is happening in the market you need to look at one chart:
The top chart is the S&P 500 since Feb. 1; the bottom chart is VIX over the same time period.
The S&P 500 is actually up 20 points since February began, not a huge move by any account.
VIX meanwhile is up a point and is well off lows we saw at the start of the month.
A flat S&P 500 and a rising VIX can only mean one thing … a major move is coming.
It could be a rally or a sell off … but a move is coming.
So, what is behind this major move build up? The easy answer is CPI, which has become almost like an earnings event for the entire market.
You can see it clearly in straddle pricing. Take a look …
The market is looking for a 35-point move on Monday … .and an 80 point move on Tuesday.
This means it will be looking for about a 50-point move heading into CPI.
That is probably too cheap.
But maybe it’s this: A lot of money has been made and algo’s abound…
From the Dec. 28 low close of 3780, the S&P 500 is still up over 300 points.
Funds and hedge funds have made a lot of money in a short period of time.
Any smart manager is going to hedge or take profits.
The S&P 500 has broken above the 200-day moving average for the longest period of time in the last year:
As traders take profits and the market softens.
If the S&P 500 breaks below the 200, we could see a quick algo flush that pushes the market lower.
A 145- point sell-off from current levels could turn into 300 or 400 in a snap if we break.
Traders may be bracing for that.
Then there is the bond market and the dollar. After a continuous slide in the dollar since early October, Invesco DB US Dollar Index Bullish Fund (UUP) has caught a bid:
The dollar is back above the lows from the end of December. If there is a global squeeze, the dollar could shoot higher which would send markets into a tailspin.
The answer actually is probably all 3 of the above…
CPI on Tuesday could be a make or break moment for the S&P 500. A bad number and we could cycle back into selling … a good number and look out – here comes 4300!
I lean toward a dip – but am open to both.
I would buy February VIX calls and puts in a strangle … but that trade is tricky for retail traders
Click above to get ready for triple profit potential.
Your Only Option,
Mark Sebastian