Living Inside a Broken Clock: Thursday, Jan. 14, 2010

by gmak

Fear and Greed are both driving the market, perhaps.

Someone came into the futures market at Noon EST and pushed volume up to over 200K contracts. That requires margin of half a billion USD. I know that the USD is equivalent to toilet paper in the minds of some, but that is NOT chump change.  A lot of correlations came to the fore with the USD weakening almost simultaneously. Whenever there is extraordinary volume, one of the places to look for explanations is the index option market.

All sorts of conspiracy theories are floating around. I say follow the money. Never mind the 65K 65K open interest at SPX = 1150 = about $7.5 billion in notional exposure for Friday AM expiry. Look at the open Call interest in February and March at the same strike price. (“OInt” on in the table – the column just in front of the white strike).  All of this may be a moot point if the open interest represents some form of calendar spread where the front month funded later months, or vice versa. 

If not, then someone is short that (wrote the options) and they are probably hedging the front month given the 2 days to expiry. The most liquid way way is to buy futures. Another way would be to buy back the options and swallow the loss (I think institutions would much prefer to hedge and keep the premium from a higher vix). Alternatively – if the options were being held by a few entities, they would probably be working to push the SPX price up. So either way – through liquidity-seeking hedges or reindeer games to realize a profit, the SPX might be pushed up through the futures market. There is only 26.5 hours until the index options expire (They settle in cash at the NY open). I don’t think that I would want to go short against that double barrel. I think that Geronimo may be firing a bit on Thursday.

April’s open interest is pretty much non-existent at this time. By coincidence, the MBS purchase program of the FED expires in March. You can draw your own conclusions. Fear or greed, liquidity is driving this market. Welcome to the broken clock.

EQUITY

Even though SPX ramped today, it closed below Monday. The purple dashed line is still dashed and not solid – so the trend is not certain to be up. OPEX. Nothing else needs to be said. In fact, there is really no point in commenting on the daily TA until Monday, at this rate.

ES ramps in the day and camps at night. Guest the Zero Hedge post on after hours shenanigans has driven the cockroaches back into the dark. ES pivots:

• R2: 1154.75 = Would be a new high, and completely unnecessary before OPEX.
• R1: 1148 = Around the peak from Monday. This is a likely target if someone is trying to cash in on the SPX=1150 options (the R1 + premium would give SPX > 1150)
• Neutral: 1138.75 = This was around the area of both resistance and support over the last 5 days.
• S1: 1132 = This is an established short term floor
• S2: 1122 = In our dreams, before next week anyway, if at all.

The world is green except for Hong Kong, Greece, and Spain. The DAX gapped up at the open but has been slipping since then. Financials and Utilities are the red sectors. Consumer Discretionary is leading. That seems contradictory to me, but what do I know?

FX

DXY is still putting in lower lows and lower highs  – looking a lot like a sloppy bear flag – on the 30 min chart. 77.06 is a very high hill to climb at the middly pivot. It looks like an attempt at showing some strength has been slapped down handily. Now if only a trader were able to count on an SPX /USD inverse correlation to bank some coin.

NEWS

DATA

Big one today, boyz and girlz!

Cheers. Duty calls.