› Stakes are getting higher for S&P500 put options

Stakes are getting higher for S&P500 put options

It’s been a tough year for global equities and U.S. indices were not an exception. After Trump’s administration announced tax cuts, implementing additional supportive measure for a growing economy, corporate profits surged and risk appetite soared. A bull run followed the technical retracement in February, Wall Street earnings jumped as investors were rushing to jump in the outgoing train, turning momre and more savings into high-yield investments. S&P500 benchmark, as well as other major stock indices in the United States, charted all-time highs, performing one of the best years after the global financial crisis in 2008. It was not only about the tax cut reform, as the economic growth was doing very well. Unemployment eased to 49-year lows, the economy was adding around 200 thousand jobs monthly on average. Average earnings jumped, supporting consumer confidence traditionally strong in the country. Export figures were climbing, narrowing the negative trade surplus in the leading world’s economy. Such scary things like monetary policy tightening and geopolitical tensions did have an effect for traders and investors in the equities market, however, those factors did not stop the bulls to keep pushing U.S. stock indices towards record values.

Although the positive impact of fiscal stimulative measures and tax cuts, everyone seemed to forget the key financial trouble for the United States which is the budget deficit. The thing is that the country is a net importer of capital, meaning that once you cut taxes without lowering budget spending, you should find some sources of funding for the whole you created. The budget deficit has been enlarged but the borrowing costs have been tightened as well, creating additional trouble for U.S. Treasury. It's become more expensive to attract foreign capital and local lending in the light of Federal Reserve hiking the interest rates. Such a negative factor together with climbing inflation caused panic for equities in October after the Fed Chairman Powell announced a potential acceleration in the regulator’s tightening in order to fight with the negative impact of inflationary pressures. Stock indices sold off, losing around 10% in one single month and erasing the majority the year’s gains. Jerome Powell did realize the trouble he caused and tried to fix the situation, publishing several dovish statements, saying that it’s not that dramatic, and the interest rates are approaching the ‘neutral level’. He pencilled a potential pause in the Fed’s tightening cycle, however, that was too late.

Negative macroeconomic data showed a certain economic slowdown. Global growth forecasts were cut by leading institutes and funds. The trade war with China started to have its influence for the investor’s worst fears to come into reality. November showed some preliminary signs of recovery, paring a third of the lates losses. Trump joined the Federal Reserve trying to help the situation. He managed to agree with China about the ceasefire in the trade war, announcing a period of 90 days to conclude the deal. White House promised to freeze import tariffs for Chinese goods until the Sino side would open its markets for U.S. goods in the agricultural, industrial and automotive sectors. Initial market’s reaction was bullish and major stock indices gained 2% in one single day of trading, however, that did not last long. As most of the bear analysts predicted, the market is turning to a bearish roller coaster, rising slowly and falling sharply, fast and hard. That’s exactly what happened last week, despite the lower trading volume as the markets were closed on Wednesday amid Goerge W. Bush Senior funeral. Heavy sell-offs pushed S&P500 benchmark to the lower rates than the year started from, eliminating all of the gains in 2018. The last time when stock indices closed negative on yearly basis was in the toughest 2008, experienced speculators remember that period and know what a nightmare it was. S&P volatility index soared to long-term peak last week, in a similar way like it was performing in 2008. Are we really heading into a recession? That question is pulsing in minds of investors and traders in the financial markets globally.

One more detail to finalize the picture was reported on Thursday last week. A mysterious overnight plunge was noticed in equity futures with a sudden move with enormous trading volume. CME Group had to intervene, halting trading in several 10-seconds intervals. Some of the authorities were talking about the trading interruption, which is an unprecedented measure. Rumours were circulating in Wall Street that some huge fund (or funds) were trying to push the market in thin trading conditions. Other were saying that someone huge is trying to get rid of chares and equities by selling off all of the latest investments made this year. In simple words, that’s a very negative factor and it happens only if people close to the sources know that something ugly is going to happen shortly. Another event did not add optimism to the traders. Canadian authorities arrested CFO of Chinese telecom giant Huawei on the extradition request by the United States. Does that mean that trade negotiations are empty and the real war continues between Washington and Beijing? Anyway, S&P500 would not chart a bullish reversal pattern on that kind of news.

Technically speaking, things are even worse than fundamentally. The recent bullish run failed to hold gains at the resistance level, peaking at the same rate of 2912.8 as it was at the beginning of November. It’s not only about the static horizontal resistance, as 89-days simple moving average comes exactly at that level. That attempt to reverse left only a shadow on the weekly candlestick, underlying the bears’ strength and a further decline. Do you know what happens with failed attempts to breakthrough resistance? Right, sell-off acceleration. Moreover, the sell-off on Thursday bottomed at the level of 2620.0, charting lower lows on the daily timeframe which is a bearish continuation sign. Daily MACD is turning negative again with the histogram is about to cross zero level. Williams %R oscillator is heading towards oversold territory. Once the level of -80 is breached, we might see an acceleration of the slide. What’s next? Bears will try their best to break the static horizontal support at 2627.8 with daily close prices. If that happened, the bulls would lose the last defence line before the uncertain groundless abyss in 2019.

Stakes are getting higher for S&P500 put options


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