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Profit-taking is healthy … right? Traders bracing for rate decisions and jobs report

Brian Shepard
mts marketrecap 330 300x207 Profit taking is healthy ... right? Traders bracing for rate decisions and jobs report

Collective Intelligence! Plenty of volatility lately, including today. Today’s economic data was mixed, including the government-shutdown-skewed, overall much better, housing data for September and October in the face of even higher rates to come. Chatter – revisions expected … However, the crowd reacted well to Sam_E(09:07) chatter a budget deal is done – imminent – by bidding the S&P 500 up to an intraday high of 1799.30, less than a handle above yesterday’s daily high. The ensuing pullback was slow, but that did not stop the sell side algos from running the S&P down to new intraday lows of 1785.00, then 1778.00 – down about 1.5% from the all-time record high run. The bulls continue to chatter that profit-taking is healthy for the equities.

Today started with 292k ESZ and 900 SPZ traded on Globex, ESZ trading range was 1795.75 – 1785.00. Tuesday’s regular trading hours (RTH’s), pit session trading range was 1786.30 – 1798.50 before settling at 1791.40, down 8.3 handles. The regular pit session trading gapped 5.5 handles lower to 1785.50 – 1786.00, testing the 18DMA at 1786.25. Following the soft open, the S&P traded sideways to higher, printing a high of 1799.30 at 9:25, and weakened going into the European close, cartervxs (10:50) Dax still pretty damn weak – closed under 50 day. Today’s intraday low, 1778.00 printed at 12:31 and was last seen on 11/21/13.

Yeah, what they said … Fed’s  Beige Book – Economy expanded at a moderate to modest pace. Taper is not tightening and is coming, but when? We have the ECB, BOE rate decisions coming Thursday, Friday’s employment data followed by the FOMC decision in two weeks. All this adds up to risk management as profits are taken and positions being hedged. Place your bets, whether it’s profit-taking, hedging an existing market position(s) or adding new positions going into tomorrow’s ECB/BOE decisions and the jobs data on Friday … either way the events are coming.

iceChat (13:40) look at [C] Citigroup almost flat on [GS] Goldman downgrade – on a day where [DJIA] was down 100 … there is a chance buyers are going become more visible into the close. iceChat (14:36) Positive chatter but no final agreement yet in Washington on a budget deal that would provide a moderate fiscal boost next year by replacing scheduled sequester cuts with increased user fees and other savings spread out in time.

Into the close: At 2:00 the S&P index was trading 1787 area when (14:00) MrTopStep MiM Closing Imbalance was showing a very small 55%, $46M to the sell side. At (14:20) the MiM was showing a small 60%, $149M to sell while the index was clawing quietly higher to trade 1795 at (14:40) while the MiM was showing 69%, $250M to the sell side. The imbalance flipped to a very small iceChat (14:48) MOC  $89mil buy as the index quietly clawed its way back to the opening range. The cash close traded 1791.70 area before settling fractionally higher on the day.  *** A little sumthin for the swingers out there … Sam_E thinks (14:54) 1795, 1799.25, 1800.75, 1808.50 all shortable.  Deutsche Bank downgrades C and MS after hours.

UBS Index: S&P 500 replacement for MOLX announcement most likely tonight …could it be FB? The deal expected to close ~12/19….who is the next potential S&P 500 add? * Index Event: Headlines hit about 20mins ago that [MOLX] / [Koch] deal is expected to close Dec 9th. Keep in mind this is the last deal expected to close in 2013 which will result in an S&P 500 add/delete.  *TOP 10 picks for S&P 500 additions (in order) are: [ATVI], [FB], [HCA], [ADS], [TSCO], [LMCA], [AMG], [AVGO], [TRW], [CXO] * Also worth pointing out MOLX market cap is ~$7bn which is much lower than FB’s $120bn market cap. While similar market cap is not officially a requirement for inclusion, it has been something people have on their radars.

Coming events: http://www.investing.com/economic-calendar/

December seasonality strong: http://marketsci.wordpress.com/

December liquidity – a different view:  http://bit.ly/IAKvtn

Below here was posted here since Monday:  New month – asset allocation, selling bonds and buying equities. Rotation within the sectors looks like they were buying S&P and the Nasdaq while selling the bonds, Russell 2000 and Dow stocks. william_blount (08:16) 1st 3 days of month have a buy bias, so bulls better darn well buy and if they dont – that is indicative of WEAK MKT. william_blount (08:56) 1802.5 spot was price of the weeek last week — BIG ARSE FOCB (Fish Or Cut Bait).

We don’t know exactly when, but when the spoos roll and they may … Raph shared, I guess we don’t discuss 0% scenarios now, that’s what its come down to. <<#thatswhatwetalkinabout

A few things to note from the Las Vegas Traders Expo — We spent yesterday afternoon at the Las Vegas Traders Expo. It was a great opportunity to get in the trenches, talk to other traders (both experienced and green), vendors, brokers, etc. We delivered a speech on option selling which gave us an opportunity to network with a community of traders that shared our advocacy of the strategy.

Many of the option sellers we spoke to were primarily (without diversification in other markets) selling puts against stock indices (S&P, NASDAQ, Russell). Not surprisingly, all of them have had a great run throughout the last few years (I only wish we would have been smart enough to be “all in” on short index puts). We are well aware that 2013 has seen a raging bull market in equities, and there is no telling when or where the party will end. Nonetheless, each day that goes by with traders growing more and more complacent in bullish strategies raises the stakes. Complacency will eventually lead to panic; it always does (unfortunately, there typically isn’t a happy medium).

Similarly, just as a market can get overcrowded and become vulnerable to a sharp correction, perhaps the strategy of selling stock index puts has become overcrowded. If the market ever pulls back, the short put traders will likely be forced to sell futures to hedge their option bets … due to mass quantities participating in this strategy, there could be significant fuel flaming the fire – @carleygarner aka Carley Garner