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Today’s Observations from the floor of the CME

Brian Shepard

By Brian Shepard 11-7-2012

It was a bit difficult to follow the Globex, election related price action last night, but it become a lot easier to understand as the morning progressed... The early election analysis showed Romney ahead, the S&P 500 future deteriorated from the mid to low 1420’s down to 1411 area at 9:06CT PM which was approximately the time President Obama’s reelection outlook was rising. As we know, the S&P then stepped higher to trade 1431.50 by 1:50AM and traded sideways to lower during the early European session. By 5:00AM, the equities lost the bid and a series of new lows followed into the midmorning US session. Traders on the CME group trading floor were a bit disappointed following the (early) Obama rally that exhausted itself in the premarket and looked to lay some blame on the pending Greek austerity vote following today's close. Popular opinion was Wall Street was more friendly to Romney, but the easy money, quantitative easing (QE) of the Obama administration would help keep the equities afloat for more than half a day. Now that the election is over, we shall find out if those QE printing presses will be working a 40 hour week or be cut back to part time too. Well, one thing's for sure - it is back to our regularly scheduled programming and less aggressive commercials.

Midday observation: With the drop in the market, gamma exposure of downside S&P 500 options increased sharply and is now close to levels we last saw in August 2011. The imbalance of S&P 500 Put to Call option gamma is close to $20bn per 1% move in the S&P 500. As some fraction of this imbalance is hedged by dealers, this could have a significant impact on the market today. Absent substantial positive fundamental developments, this is likely to cause further selling pressure on stocks from 3 to 4PM as dealers hedge into the close. From Derivs

We noticed a considerable slowdown in volume and volatility midday in the equities. A large percent of our east coast peeps left by late morning due to the nor'easter and the expected rain & snow as well as 50 -70 mph winds. It is quite possible that some of those that left early were enticed to exit early due to the nearly 4% rally in crude on Wednesday followed by a sharp reversal of 4% today! We did not hear any about any margin calls, that does not mean that the phones were not ringing off the hook.

MrTS video: S&P and 30 year bond http://www.mrtopstep.com/11-7-12-tim-haefke/

MrTS Charts: William Blount observations:  http://www.mrtopstep.com/blount-observations/

Wednesday started with above average Globex volumes and trading ranges. The downside retracement from yesterday's settlement price of 1425.20 to last night’s low of 1411 created lot of chatter on social media sites along with the election night swings. The regular trading hours (RTH’s) opened at the daily high of 1410.50 - 1410.00 and just deteriorated throughout the morning and up until the European close at 10:30CT. By the time the protective stop losses, placed under the late October lows, 1397 RTH’s and the Globex low of 1393 area were cleared out the S&P was 46 handles under the overnight high of 1431.50 which was last Fridays, jobs number high. Since we are located on the CME Group trading floor, we tend to follow the price action from the RTH’s session while keeping an eye on the Globex session(s) highs, lows and closes. With that in mind, the subsequent rally from today's RTH’s low of 1384.30 found itself fighting and briefly breaching the same 1397 area while holding above the 1393 area during the midday trade. At 2:45ish 1394 area was trading when the closing imbalance showed 20 of the Dow 30 to sell with decent size and the broader market showed a modest $210M to sell. On the 3:00 cash close, the SPZ traded 1391 area before settling at 1389.10 on the 3:15 futures close, down 36.1 handles on the day. 

Story written by Brian Shepard, 20 year member of the CME Group