Actually, this is the first sensible thing this index has done in a while, and we don’t just mean closing inside its zone.
When we say sensible, we probably mean normal, as under “normal” conditions, if an index missed its zone for their expiry, the quite common trait is for it then to gravitate towards it immediately thereafter.
Which is what has just happened, as, let’s face it, with virtually no ratio around it to speak of, it could have easily pinged one or two hundred points in either direction.
And this remains the case, as under these current ratio conditions, we hardly think it is going to stay zone-bound, although, back in the day, we have seen this index stay inside its zone for an entire expiry.
On the 21st we mentioned the chance the zone may change to 2695-2705, which it obviously hasn’t, even when this index hit the intraday low of 2727.10.
It still could, very easily, but the fact it didn’t, would have helped to see this market recover over the last two days.
So, the risk is still there, albeit slightly mitigated, but as Y1 stretches all the way down to 2690, this has always been the case.
Overall, it is very disappointing to see so little change in the ratios, after all, they are so low, it’s not as if it would take very much.
However, perhaps every little helps, and so, for us, the most significant moves are in the R1 ratio levels, both above and below the zone, even if, this just goes towards narrowing a still gargantuan Y ratio bandwidth.
Range: 2795 to 2805
Activity: Poor
Type: On balance fractionally bearish
Nb. Our comment for 04/29/20
Sadly, this is just the scenario we are afraid of.
Basically, the market isn’t going up because everybody believes the crises is over, it’s going up because there is no ratio to oppose it.
Again, the regulators should be aware of market dynamics, and take great pains to avoid exactly this sort of situation, as it only leads to false, and therefore misleading, interpretations.
The fact of the matter is, R1, above the zone, still does not kick in until 3205.
Where this is a distinct improvement from 3305 (on the 24th), what it means in practice, is that this index could easily recover back up to the 3300’s.
And that, to us at least, is dangerous, as it will be as if nothing has happened, and even the most isolated person in the world, knows that this is just not the case.
Take into consideration that we were looking for a 10% contraction anyway, this being how overstretched it had become, means that if this is the case, then there has been no adjustment for the economic impact that we have witnessed in the last 6-weeks at all, which is madness.
The astute may want to take note of the fact the corresponding R1 ratio does not appear until 2595, so this could most easily become a two-way street.
However, this time, there is no B1 at 2195 to come to the rescue.
It may be worthwhile comparing this index to the FTSE, as at least that has some ratio, and is reacting to it, so, you know, that there is money, and therefore, belief, backing that move.
Contrast that to the activity registered here, and perhaps worth knowing that yesterday, it was “moderate”, so hardly representative of players falling over themselves to get involved.
Hopefully, we are wrong, but this is just the sort of move, that screams beware to us, as it should, but won’t, to the regulators.
Range: 2805 to 3205
Activity: Only just registered
Type: On balance bullish
The definitive story of the Big Bang, The Great Storm and the market crash of ’87.
Three days later and we are right back to where we were.
Although this is technically strike three, it is really only strike two in this, the May, expiry.
So, we still think it will be a very stern test for this market, as there could still be a lot of nervous people out there, who could easily get spooked by some dynamic delta futures selling.
The zone has changed, and moved up, to 5650-5750, which normally would be a good thing.
However, we are rather sceptical of this move, as it is just within the minimal Y1 ratio, so hardly an onerous achievement.
In fact, it was a very close call, as to whether we made the zone to go from 5650 all the way up to 5750.
We have seen this before, and it makes for a very volatile market.
But, an outstanding trading one.
The big takeaway, is the fact that no other ratio has changed, so there is no corroborating evidence to back this zone move as directional, as opposed to technical.
Could be a big day today, or just a repeat of the last time we were here, sadly.
Range: 5500 to 5850
Activity: Average
Type: Neutral
Nb. Our comment on 04/28/20
Well it is a textbook market at the moment.
Three very solid attempts to breach R1 at 5850 throughout the day, each one lasting a good fifteen minutes, so not just spikes.
Obviously, didn’t quite have enough, and, as we said, we thought it would be a stern test.
Then, in the last quarter of an hour of real time trading, the market got back up to 5829.49.
And, our old friend, the auction, took it back up to within spitting distance for tomorrow.
Absolutely classic.
However, the most important aspect for us, is that the bulls are very evidently back, and, more to the point, willing to take on R1 without running away scared.
The only ratio to change, is R3 below the zone.
The implication of this, is not that it is static, but rather the zone could still easily be 5550 all the way up to 5750 (apologies for the typo on the 24th when we said 5650 to 5750).
So, make no mistake, there is still a considerable risk out there, but at least it is a far more balanced and rational market, at present at least.
Range: 5750 to 5850 or 5850 to 6050
Activity: Moderate
Type: On balance only just bullish
The definitive story of the Big Bang, The Great Storm and the market crash of ’87.
We finished off the April expiry by saying this market was “whacky” and the “zone could move at the drop of a hat”.
Both are still as valid in this, the May expiry.
In fact, we are seeing a serious move in the ratio, that could signal the zone moving down to 2695-2705.
Although this is very early in the expiry, there are still some interesting points to take away.
First, is that the zone in May has started at the same level as the April zone ended.
The significance of this, is that the market was below this level for the two weeks prior to its expiry, so, one could argue, that the zone being here helped the market to recover.
And, if anyone is still in any doubt about derivatives affecting the underlying, then look no further than WTI dropping to minus $40, enough said.
There is still a ridiculously wide Y ratio bandwidth, currently 815-points, so don’t expect sanity returning anytime soon.
In fact, if it does, and the ratios haven’t filled in considerably, then don’t believe it.
There is only a day separating the two columns in the table above, but the fact not even the lowest ratios have been able to move, and activity is “poor”, means this is sufficient to show that nobody is taking a view, hopefully, yet.
This market could go anywhere within the Y ratio bandwidth, quickly and significantly, but a falling zone is not good, especially if it drops below the current market.
Range: 2805 to 3005
Activity: Poor
Type: On balance bearish
Nb. Our comment for 04/24/20
Actually, this is the first sensible thing this index has done in a while, and we don’t just mean closing inside its zone.
When we say sensible, we probably mean normal, as under “normal” conditions, if an index missed its zone for their expiry, the quite common trait is for it then to gravitate towards it immediately thereafter.
Which is what has just happened, as, lets face it, with virtually no ratio around it to speak of, it could have easily pinged one or two hundred points in either direction.
And this remains the case, as under these current ratio conditions, we hardly think it is going to stay zone-bound, although, back in the day, we have seen this index stay inside its zone for an entire expiry.
On the 21st we mentioned the chance the zone may change to 2695-2705, which it obviously hasn’t, even when this index hit the intraday low of 2727.10.
It still could, very easily, but the fact it didn’t, would have helped to see this market recover over the last two days.
So, the risk is still there, albeit slightly mitigated, but as Y1 stretches all the way down to 2690, this has always been the case.
Overall, it is very disappointing to see so little change in the ratios, after all, they are so low, its not as if it would take very much.
However, perhaps every little helps, and so, for us, the most significant moves are in the R1 ratio levels, both above and below the zone, even if, this just goes towards narrowing a still gargantuan Y ratio bandwidth.
Range: 2795 to 2805
Activity: Poor
Type: On balance fractionally bearish
The story of the Big Bang, The Great Storm and the crash of ’87.
Getting that feeling of Deja vu again, greatly enhanced with a healthy dollop of coincidence.
As it was back on the 14th, please see above, that the market was at 5842.66, and facing R1 at 5850, albeit in the April expiry.
The first meaningful ratio it had run into now the market was back above its zone, and so therefore, the first futures selling brought about by the dynamic delta.
As history shows, it didn’t react well, dropping to 5575 by Wednesday 15th, with a repeat of this intraday low on the Thursday.
And so, here we are, in the May expiry now, and the market is again facing R1 at 5850.
The big difference this time, is now it is at the start of the expiry, rather than the end.
However, whether this will embolden people to push through the dynamic delta, remains to be seen.
Otherwise, since the 14th, the ratios for this expiry have filled out quite nicely.
So, there is a decent range and depth already in situ, now all we have to ascertain is the markets appetite.
One word of warning, is that the Y ratio bandwidth does stretch from 5850 all the way down to 5350, so if it turns out it’s not that hungry, then that’s a solid 10% potential pitfall.
Range: 5650 to 5850
Activity: Very good
Type: Neutral
Nb. Our comment on 04/24/20
Three days later and we are right back to where we were.
Although this is technically strike three, it is really only strike two in this, the May, expiry.
So, we still think it will be a very stern test for this market, as there could still be a lot of nervous people out there, who could easily get spooked by some dynamic delta futures selling.
The zone has changed, and moved up, to 5650-5750, which normally would be a good thing.
However, we are rather sceptical of this move, as it is just within the minimal Y1 ratio, so hardly an onerous achievement.
In fact, it was a very close call, as to whether we made the zone to go from 5650 all the way up to 5750.
We have seen this before, and it makes for a very volatile market.
But, an outstanding trading one.
The big takeaway, is the fact that no other ratio has changed, so there is no corroborating evidence to back this zone move as directional, as opposed to technical.
Could be a big day today, or just a repeat of the last time we were here, sadly.
Range: 5500 to 5850
Activity: Average
Type: Neutral
The story of the Big Bang, The Great Storm and the crash of ’87.
Well we didn’t publish anything about the May expiry back on the 15th, however we did about the April expiry, so here is a few words about how April expired on the 17th.
And to be honest, we couldn’t really believe it ourselves, when the market closed at 2799.55 on the 16th April, the day before the expiry.
Despite being in what we described as a “frictionless market” we were stunned to see it get so close to the dead centre of its zone with the expiry imminent.
Sadly, in the very end, we didn’t get the expiry settlement price in the zone, but, especially under the conditions, it wasn’t at all a bad attempt.
Also, considering it was Y1 in that expiry, all the way up to 2855, which was a considerable improvement from our last published level of 3315 for sure, but still hardly expensive after all.
Rather coincidentally, the actual settlement price was 2855.70, for the record.
Range: 2595 to 3315 (from the 15th)
Activity: Poor
Type: Neutral
Nb. Our comment for 04/21/20
We finished off the April expiry by saying this market was “whacky” and the “zone could move at the drop of a hat”.
Both are still as valid in this, the May expiry.
In fact, we are seeing a serious move in the ratio, that could signal the zone moving down to 2695-2705.
Although this is very early in the expiry, there are still some interesting points to take away.
First, is that the zone in May has started at the same level as the April zone ended.
The significance of this, is that the market was below this level for the two weeks prior to its expiry, so, one could argue, that the zone being here helped the market to recover.
And, if anyone is still in any doubt about derivatives affecting the underlying, then look no further than WTI dropping to minus $40, enough said.
There is still a ridiculously wide Y ratio bandwidth, currently 815-points, so don’t expect sanity returning anytime soon.
In fact, if it does, and the ratios haven’t filled in considerably, then don’t believe it.
There is only a day separating the two columns in the table above, but the fact not even the lowest ratios have been able to move, and activity is “poor”, means this is sufficient to show that nobody is taking a view, hopefully, yet.
This market could go anywhere within the Y ratio bandwidth, quickly and significantly, but a falling zone is not good, especially if it drops below the current market.
Range: 2805 to 3005
Activity: Poor
Type: On balance bearish
The story of the Big Bang, The Great Storm and the crash of ’87.
Well we didn’t publish anything about the May expiry back on the 14th, however we did about the April expiry, and again on the 17th, so here is a few words about how April expired.
Despite our trading range being up to the bottom boundary of the zone (5650), as the market had managed to position itself just below this, we felt fairly confident we would see the settlement price within its zone.
After all, that was a lot of business done to get the zone to 5650-5750, so there was a lot riding on it.
In the end we suspect they were done by their own success, as the settlement price was 5798.85, almost a full 50-points above the upper boundary, and we really didn’t see that coming.
But, as we said on the 17th, the expiry, for us at least, wasn’t as important as the fact that the market was pretty much back to normal, and players were participating again.
Range: 5150 to 5650
Activity: Good
Type: On balance just bullish
Nb. Our comment on 04/21/20
Getting that feeling of Deja vu again, greatly enhanced with a healthy dollop of coincidence.
As it was back on the 14th, please see above, that the market was at 5842.66, and facing R1 at 5850, albeit in the April expiry.
The first meaningful ratio it had run into now the market was back above its zone, and so therefore, the first futures selling brought about by the dynamic delta.
As history shows, it didn’t react well, dropping to 5575 by Wednesday 15th, with a repeat of this intraday low on the Thursday.
And so, here we are, in the May expiry now, and the market is again facing R1 at 5850.
The big difference this time, is now it is at the start of the expiry, rather than the end.
However, whether this will embolden people to push through the dynamic delta, remains to be seen.
Otherwise, since the 14th, the ratios for this expiry have filled out quite nicely.
So, there is a decent range and depth already in situ, now all we have to ascertain is the markets appetite.
One word of warning, is that the Y ratio bandwidth does stretch from 5850 all the way down to 5350, so if it turns out its not that hungry, then that’s a solid 10% potential pitfall.
Strange how these things work out, but 5450 was the bottom of our trading range when we last looked, and here it is, now as the bottom of the new zone.
Truly and sincerely our apologies as we really should have looked at the FTSE since the 30th March, especially under the circumstances.
As you can see in the table above there have been huge changes, not unexpected of course, but now, we just don’t know when they happened.
But it is worth remembering what we said above, “However, if the zone does become 5550-5650, then we would expect to see R1 kick in at 5450 below it, and 5850 above it, but in the meantime, the above is what it is”, as the levels you see now were all in the picture back then.
Just not quite how we predicted, but then again, in these markets, and especially as it has been two weeks in them, then we are more than happy with this, ecstatic really.
The most interesting aspect, for us at least, is the fact this market is back above its zone, as that means it is back in bullish territory, and who would have thought that, even a few days ago.
Talking of which, this expiry has just 4 days to run, so for those of you unfamiliar with this analysis, this is now the rollover.
Boy, it would be quite something, considering all that has happened, if this index expired in its zone.
But, first things first, and it has R1 at 5850 to contend with, and how it reacts to this, will very probably tell us all we need to know about how this expiry will end its last few days.
Range: 5550 to 5850
Activity: Average
Type: On balance just bullish
Nb. Our comment on 04/17/20
To be honest we were surprised to see the zone move again, but that was only because we didn’t expect there to be many players returning to the market.
But, and as we said above, first things first, and how the market reacted to 5850 did indeed tell us all we needed to know.
Again, we must stress that these calculations should be done daily, otherwise we can’t capture when the zone did actually change.
However, considering the level of activity that we can see, and therefore what must have been transacted prior to this, it is a fairly safe assumption that this change took place for Thursday.
Funnily enough, whether or not the market manages to expire in its zone tomorrow, is not the most important aspect for us, although that indeed, would be remarkable, especially considering the circumstances.
What is the most interesting thing, is the fact that when the market reacted so badly to R1 at 5850, tumbling all the way back to 5576.35, there were enough players, and of sufficient size, to take a punt, and go for a 5650 to 5750 settlement price window.
Ballsy doesn’t begin to cover it.
Dare we even whisper it, but could normality be returning to this market?
The really important detail will now be how the May expiry will set itself up, and therefore, how the market will react from Monday, once these expiry trades are no longer influencing proceedings.
Needless to say, we have never seen anything quite like this, and “moderate” activity, and we were being generous, is probably the reason why.
It is very low, but totally understandable considering the circumstance.
However, this in no way distracts from the issues it causes, and the fact that this market is in a Y2 ratio bandwidth that stretches for 400-points, tells you all you should need to know.
For the record, the entire Y ratio bandwidth is an unprecedented 890-points.
Now it is downright weird the zone hasn’t moved, but it doesn’t really need to, as the market being in minimal Y ratio, it could easily, at the drop of a hat.
Some facts, R1 has dropped 300-points and R2 is down 150-points, but thereafter it remains quite steady.
But, as we said last time, fingers-crossed the market bounce from B1 when it was at 2195 (market low 2191.86) is going to be enough, as although it hasn’t moved this time, it did last time, and that was to 1995.
Whatever rhetoric, true or false, comes out of whatever politician, and whatever fundamental or technical analysis says, the ratios are a pure and direct reflection of real and actual money laid down on the table in the index option market, and that is, to us at least, far more representative of what people are really thinking.
The low activity suggests this is minimal conviction, and with the trading range being 2495 all the way up to 3245, so the recent 165-point move since we last published, is really, neither here or there, and therefore, entirely meaningless.
Expiry is at the end of the shortened next week, and we rather doubt it will be as quiet as this week has been, and, yes, we do know it moved 7% on Monday.
Range: 2495 to 3245
Activity: Moderate
Type: Neutral
Nb. Our comment for 04/15/20
As we said on the 9th, the zone could “move at the drop of a hat”, and it has.
The market is still “whacky”, but, in all honesty, its sort of exactly what we would expect in such a huge Y ratio bandwidth.
On Monday the zone did actually drop to 2995-3005, but at the same time Y2 collapsed to 2595 from 2895, so this was never going to be the end of its move.
In the meantime, it seems the market and the zone have crossed, going in opposite directions, and what’s more, it looks rather likely the zones next move will be to 2745-2755.
At the end of the day, the Y1 ratio bandwidth, which includes the zone, stretches from 2595 all the way up to 3315, and the zone could end up anywhere within it really.
This is what we call a frictionless market, although, to be fair, it normally only ever applies to the NDX, so it is very rare, unprecedented actually, to see it here in the SPX.
Basically, this means with the absolute smallest possible momentum, the market goes a very long way, a bit like being on ice.
Normally, we only have to explain whether it is a stream, river, pond or lake that is frozen over, to give some inkling of the magnitude of movement possible with the minutest prod.
Here, its more like a frozen ocean.
Considering everyone is talking about the coming recession being worse than the Great Depression, the SPX being off just 15% is as whacky as it gets, especially when you consider we had been saying for a very long time it was 10% offside before all this anyway.
Obviously, the end of the March expiry was a train wreck, and because of this, the next expiry, April, just can’t adjust quickly enough.
This remains the case, as the table above shows a very unusual ratio configuration.
However, it does appear as if 5550-5650 will very probably be the next zone.
Which, if this is then the case, it is worth noting that the close on Thursday, 5815.73, would have been above it, as would have been Wednesday’s, at 5688.20.
Basically, it is just struggling to find a degree of normality, which it will just not do until the zone does actually change.
Then, and only then, can the ratios either side start adjusting into the more regular pattern.
However, if the zone does become 5550-5650, then we would expect to see R1 kick in at 5450 below it, and 5850 above it, but in the meantime, the above is what it is.
This would then still leave a 400-point Y ratio bandwidth, which would include the zone, but would give plenty of room for manoeuvre to this market.
It would be nice to see this market return to normal, not that it was acting normally prior to this, but past experience, specifically 2009 and 1987, suggest that it takes a good few months or expiries, for this to happen.
Although, this is more a London specific problem, as the US derivative markets “spin-on-a-dime” and practically adjust overnight, or at least in a matter of weeks, not months.
Range: 5450 to 5700
Activity: Moderate
Type: On balance bearish
Nb. Our comment on 04/14/20
Strange how these things work out, but 5450 was the bottom of our trading range when we last looked, and here it is, now as the bottom of the new zone.
Truly and sincerely our apologies as we really should have looked at the FTSE since the 30th March, especially under the circumstances.
As you can see in the table above there have been huge changes, not unexpected of course, but now, we just don’t know when they happened.
But it is worth remembering what we said above, “However, if the zone does become 5550-5650, then we would expect to see R1 kick in at 5450 below it, and 5850 above it, but in the meantime, the above is what it is”, as the levels you see now were all in the picture back then.
Just not quite how we predicted, but then again, in these markets, and especially as it has been two weeks in them, then we are more than happy with this, ecstatic really.
The most interesting aspect, for us at least, is the fact this market is back above its zone, as that means it is back in bullish territory, and who would have thought that, even a few days ago.
Talking of which, this expiry has just 4 days to run, so for those of you unfamiliar with this analysis, this is now the rollover.
Boy, it would be quite something, considering all that has happened, if this index expired in its zone.
But, first things first, and it has R1 at 5850 to contend with, and how it reacts to this, will very probably tell us all we need to know about how this expiry will end its last few days.
All we can say is that we hope B1 when it was at 2195 and the market hit the intraday low of 2191.86 is going to be enough.
If so, it means this market will need a good memory, something in fast markets it’s not exactly renowned for.
The reason we say this is because the ratios below the zone continue to tumble.
Last time the ratio range was 2380 (R3) to 2745 (R2), so the big moves we have seen in the last few days were only to be expected.
Although, we were going to get big moves no matter where the ratios were.
As the market has recovered a bit, and don’t forget end of quarter rebalancing, we have put today’s trading range at 2545 to 2795, but we are not daft enough to think this market is going to open above 2545, so this is just protocol.
Basically, R3 is now 2305, and for us that is a finger crossing and hope support level, with the top end of the range 2545, being where R2 has fallen to.
In effect, this is the market staying within the same bandwidth.
We say, we hope, because B1 has collapsed to 1995, so we sincerely hope we don’t have to call on that again.
The zone will move, but really it should have done so by now already, again a concern, as is the very low levels of activity.
The ratios are what they are in the table above, but please remember, they are changing all the time.
Range: 2545 to 2795
Activity: Poor
Type: Neutral
Nb. Our comment for 04/09/20
Wacky markets, whatever way you look at them.
Needless to say, we have never seen anything quite like this, and “moderate” activity, and we were being generous, is probably the reason why.
It is very low, but totally understandable considering the circumstance.
However, this in no way distracts from the issues it causes, and the fact that this market is in a Y2 ratio bandwidth that stretches for 400-points, tells you all you should need to know.
For the record, the entire Y ratio bandwidth is an unprecedented 890-points.
Now it is downright weird the zone hasn’t moved, but it doesn’t really need to, as the market being in minimal Y ratio, it could easily, at the drop of a hat.
Some facts, R1 has dropped 300-points and R2 is down 150-points, but thereafter it remains quite steady.
But, as we said last time, fingers-crossed the market bounce from B1 when it was at 2195 (market low 2191.86) is going to be enough, as although it hasn’t moved this time, it did last time, and that was to 1995.
Whatever rhetoric, true or false, comes out of whatever politician, and whatever fundamental or technical analysis says, the ratios are a pure and direct reflection of real and actual money laid down on the table in the index option market, and that is, to us at least, far more representative of what people are really thinking.
The low activity suggests this is minimal conviction, and with the trading range being 2495 all the way up to 3245, so the recent 165-point move since we last published, is really, neither here or there, and therefore, entirely meaningless.
Expiry is at the end of the shortened next week, and we rather doubt it will be as quiet as this week has been, and, yes, we do know it moved 7% on Monday.
