T3’s Take 3: Nuclear Summer
1) Fear Returns
Traders were on edge again today on fears of a conflict with North Korea.
Japan and South Korea warned that they would not tolerate aggressions from North Korea, including a missile launch at Guam.
News reports indicate that Japan moved a PAC-3 Patriot missile system to Tokyo to shoot down North Korean missiles.
Sentiment has been rapidly declining.
The CBOE equity put-call ratio hit 0.83 yesterday, which is the highest reading since April 13, 2017.
And what happened on April 13, 2017?
The US military dropped that giant 22,000 bomb on ISIS forces on Afghanistan, which coincided with escalating tensions with North Korea. And a week prior, the US attacked Syria.
As of yesterday's close, the 3-day moving average for the equity put-call is now 0.76, which indicates negative short-term sentiment. And tomorrow morning, it should be much, much higher, since traders often buy lots of put options when the market drops quickly.
Stocks immediately sold off at the open, and volatility expectations went into overdrive. the VIX rose as high as 16.17. putting it 82% above the July 26 record low at 8.84.
That put my long VIX options trade nicely in the green. I used the pop to exit a big part of my position.
I'll look to get out of the rest tomorrow, and depending upon what I see tomorrow, I may end up getting short the VIX heading into the weekend.
2) Ugly Action
The market did nothing in June, but judging by today's big move in the VIX, August may be another story altogether.
The SPX fell as low as 2444.91 this morning before bouncing, and then driving lower into the close to at 2438.21, down -1.5%.
We saw relative weakness in key areas of the market like large-cap technology, biotechnology, and small caps. Traders watch these groups to judge the market composure.
High-yield, regional banks, and materials ETF's also took big hits.
This implies that traders are fearful of the overnight news flow.
Meanwhile, “risk off” instruments like US Treasuries, silver, gold, and utilities stocks performed well, with the Vaneck Vectors Gold Miners ETF (GDX) rising 1.6%.
In early June, my colleague Jeff Cooper delivered compelling analysis on gold, saying the folowing:
The breakout above $1280 is confirmed by trade over $1295, which issues significantly higher projections which we will detail before the weekend.
At the same time, a close in gold above $1285 and especially $1295 on the important Friday weekly closing basis validates the idea of a new leg higher.
Gold is now flirting with $1295, so keep an eye on it. If Jeff is correct, we could see a major rally.
3) Scott Redler's Take: 75% Chance of Stormy Weather
This afternoon, Scott Redler appeared on CNBC's Futures Now Show to discuss the market's recent breakdown.
He estimated that there was a 75% chance that we'd see more trouble ahead.
In terms of specific market levels to watch, Scott said it was important to see how the SPX and QQQ handled their respective 50 day moving averages at 2455 and $141.35.
Both levels were lost today, so it's clear that the bears have scored their first real victory in quite some time.
Click here to watch Scott's segment