Light futures market volume, and surprisingly light volatility

 

Another wave of stock selling in China failed to excite the U.S. equity market bears. In our opinion, the bears are simply busy doing other things (not trading). In regard to both volume and volatility, this is one of the most sluggish markets we've ever seen during our time as commodity brokers. It feels like Christmas in August! (If you've ever followed the markets over the holidays, you know what I'm talking about).

We've been reminding our readers of the fact that China is a communist country with few rules. When things get bad, they simply fabricate stability through money printing, legal restrictions on stock selling, currency market manipulation, implementing constructions projects with no real purpose, etc. Last night the Chinese central bank reached into their bag of tricks, and pulled out one of the largest cash injections into their financial system in nearly 2 years to put the brakes on economic contraction. Despite the government's intention of stability, the reaction was panic.

 

However, we suspect Chinese investors will soon get back to the buy side of the market. Now that the shock is over, they will likely justify bullish trades by the fact that the Chinese government is doing everything it can to pump up share prices.

A recovery in Chinese equities, should lead to new highs in the U.S. In our opinion, global equity traders could have easily followed the Chinese market's lead lower on Tuesday, their reluctance to suggests underlying strength in on Wall Street.

Futures market specs seem to be too comfortable on the short side of Treasuries

As much as we want to be bearish in the Treasury complex, we can't do it in the face of a moderately aggressive net short position in the 10-year note held by small speculators, and a seasonally bullish late August. We've seen what happens when the Treasury note futures bears get too comfortable in this market, and we suspect we'll get a repeat (short squeeze).

The 30-year bond futures contract is harder to chart than the 10-year note Treasury future due to the changes in deliverable security and, therefore, duration and volatility in the contract. However, the 10-year note appears to be on track for a move toward the 130 area. If we are right about this, the ZB should print in the low 160s. Of course, tomorrow's Fed minutes (summary of the last FOMC meeting) will probably be the deciding factor.

If the low 160s in the 30-year bond futures, or the 130 area in the 10-year are seen, they should be attractive places to look for a reversal.

From Friday but worth noting:

We've noticed one of the seasonal services is issuing a buy recommendation in the ZB from now through September 1st. We have a hard time getting bullish from this level, but if you are holding bearish positions you should likely make sure your bet is hedged. 15 of the last 15 years have seen the 30-year bond move higher in the last two weeks of August.

Treasury Futures Market Analysis

**Consensus:** Too many shorts, and strong seasonals are pointing higher.

**Support:** ZB : 157'15, 155'16, 152'30, 150'19, and 148'13 ZN: 127'06, 126'08, and 125'09

**Resistance:** ZB : 160'02, 161'13 and 164'01 ZN: 128'02, 128'18, and 129'03.

We can't recall a quieter stock index futures market

Aside from a few temporary breeches, the e-mini S&P 500 futures have traded in a range between 2060ish and 2110 since April. If you've done that math, this is a roughly 2.5% price range. Not surprisingly, the VIX is trading at a relative discount. The September VIX futures are valued at 15.25 but the CBOE's cash market calculation is running just under 14.00. To put things in perspective, the 52 week low is 10.88 so the index is actually suggesting a small amount of nervous tension despite historically low volatility in the ES futures market.

We also took a look at the implied volatility calculations on the e-mini S&P futures. If you aren't familiar with implied volatility, it is essentially the amount of price premium the option market is pricing into option contracts due to anticipated changes in volatility. In other words, if traders are expecting an uptick in volatility, they are more prone to bid the price of options higher to reflect those expectations. This "overvaluation" in the option premium is the implied volatility. At the moment, the average implied volatility in ES options is hovering a little under 12. The 52 week low, slightly sub-10, occurred last September just before the October swoon.

Either the bears are jumping the gun, or they are on to something. In our opinion the answer is both. Nevertheless, they are probably early; both the ES price chart, the artificially inflated volatility, and seasonal tendencies (see stat below), call for new highs before anything dramatic can happen on the downside.

Don't forget about futures market seasonals:

Be aware of a seasonal buy signal issued by MRCI that suggests the ES has a tendency to trade higher from August 19 through September 13th. According to the service, this trade has worked 87% of the time over the previous 15 years. With this in mind, it seems to make sense to be bullish on dips for now.

Stock Index Futures Market Analysis

**Consensus:** Monday saw a break-out, but the buying fizzled. 2090 is critical support for the bulls, who have the edge. New highs?

**Support:** 2069, 2059, and 2033

**Resistance:** 2111, 2123 and 2137

e-mini S&P 500 Day Trading Levels

**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**

Sell Levels: 2105 (minor), 2111, and 2123

Buy Levels: 2090 (minor), 2078, 2072, and 2052

In other commodity futures and options markets....

May 14 - Buy an October Sugar 1325 call, sell a 1425 call, and then sell a 1225 put. This should be an even money spread, or free trade, but involves margin and unlimited risk below 1225. The max profit is about $1100 before transaction costs.

June 16 - Buy back short October sugar 1425 call (part of spread) to lock in the profit. We'll hold the other legs of the option spread for now (which are under pressure).

June 29 - Go long the Aussie dollar via e-micro futures near 7640ish.

July 6 - Add to the bullish Aussie dollar trade with the purchase of another contract (e-micro for most). This dollar cost averages the position to a more favorable level.

July 21 - Buy December e-micro gold near $1106.

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)