Stocks and the Danger of Saying "This Time is Different"

If last week's sell-off continues, support could emerge around SPX 2,700

Senior Vice President of Research
Mar 11, 2019 at 8:21 AM
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"...with 2,800 on many radar screens due to the action around this level that I just described in late 2018, potential buyers may perceive danger at 2,800, potentially flipping the supply-demand equation back in favor of the bears…At the risk of saying, ‘this time is different,’ perhaps it is best to describe what I see as the similarities and differences between 2018 and the present…Secondly, the SPX's technical backdrop is on more solid ground relative to the fourth quarter of 2018. Prior to the three major sell-offs that occurred as the market was trading around 2,800 in the fourth quarter."
-- Monday Morning Outlook, March 4, 2019

Last week’s market action is a perfect example of why it is dangerous to say "this time is different" when analyzing the markets. This is especially true after the S&P 500 Index (SPX - 2,743.07) entered last week around the 2,800 area, which is where sellers emerged in a big way multiple times in 2018. Yes, the SPX was on more firm footing from a technical perspective relative to the fourth-quarter 2018 failures at 2,800. And there were no visible changes in the Fed’s outlook over the course of last week, one that is more dovish and thus a tailwind for market participants relative to 2018. 

The point I was making was there might be less risk of a sell-off like those that occurred from 2,800, albeit a speed bump in the 2,800-2,820 area was likely. But as last week proved, less risk does not mean zero risk, as indeed the SPX experienced a decline of about 2.2%, its worst week of 2019. 

The decline is not (yet) even close to the sell-offs that occurred from SPX 2,800 last year that ranged from 6% to as much as 16% over two-to-three-week periods, but the current selling may not yet be over. Only time will definitively answer how much selling is left, if any.

A bull would have been more impressed with the market going sideways amid a flurry of headlines that may have been reasons for sellers to emerge, in addition to the technical reasons as described above. In other words, a powerful 1-2-3 combination of punches sent the bull into the ropes. The first punch that landed was the European Central Bank (ECB) lowering the eurozone’s growth forecast in 2019 from 1.7% to 1.1%. This was followed by China releasing disappointing trade figures on exports, and a U.S. Labor Department report that showed job growth nearly 90% below expectations. While we have been told to prepare for a slowdown in economic growth, these reports might have implied that growth could be even slower than expected.


“…the SPX pushed through the 2,758 level, which is 10% above its 2018 closeCorrective moves, like we saw in the fourth quarter of last year, aren't typical once an index reaches a round-number year-to-date percentage gain like 10%, but such levels will often act like short-term speed bumps. That said, one should not be surprised to see a retreat below 2,758 in the absence of positive headlines this week, and in the absence of forced buying related to expiring call open interest."
-- Monday Morning Outlook, February 19, 2019

It was enough to cause longs to relinquish positions, who may have been anxious to do so anyway, as the SPX’s high the week prior was almost 20% above the December low.  And it appears I was a few weeks early when I said do not be surprised if the SPX retreats below 2,758, which is 10% above its 2018 close. The SPX went on to advance another 1.6% before closing below this level roughly two weeks after I raised this possibility to readers. 

However, it is encouraging for bulls that Friday’s close occurred around the SPX’s year-over-year breakeven level, as the March 8, 2018, close was at 2,738.97. If the SPX is to close at or above its year-over-year breakeven by the end of this week, it would have to close at or above 2,747.33. If Friday’s trading marks a meaningful low, it would be interesting from the perspective that it occurred above its 50-day moving average in the 2,670 area, which might be an entry point some are looking for that missed out on the 2019 rally to this point.

A sell-off on par with 2018 would push the SPX at least 6% lower to the 2,630 area. However, if the selling continues, I see support first coming in around the round 2,700 century mark, which is around its 80-week moving average that marked the October 2018 lows. Moreover, SPX 2,700 is equivalent to the SPDR S&P 500 ETF Trust (SPY - 274.46) 270 strike, which is home to huge March expiration put open interest, set to expire this week. This strike could be a magnet due to the huge open interest, but there is little in the way of additional put magnets below this strike.

The 2,675-2,680 area is also potentially supportive, as it is the site of potential trendline resistance connecting the early October and early December peaks and the Jan. 30 close, when the Federal Open Market Committee held rates steady.

SPX daily chart MMO March 11

The upside to March expiration week is that if the SPY can climb above the put-heavy 275 strike, equivalent to SPX 2,750, the unwinding of short S&P futures positions related to expiring put open interest at the 270 and 275 strikes could give the bulls a little extra power in a “counter-punch” rally.

SPY March OI MMO March 11


The data in the weekly Commitment of Traders (CoT) report is finally caught up after the government shutdown caused a delay in weekly data updates. A risk creeping into the market is the positioning of large speculators, which is now approaching a net short of nearly 100,000 contracts, compared to the 140,000 net short at the beginning of October 2018. This group has been on the wrong side of major volatility moves, so it is likely that the next major move in volatility is higher relative to lower. 

But the timing is less clear from this analysis. As I noted in a tweet last Thursday, the 18 level on the Cboe Volatility Index (VIX - 16.05) has taken on importance, both last month and this month; it is roughly half the December 2018 closing high, and a level we focused on as volatility, as measured by the VIX, declined from the December peak.  After a few fake-out closes below 18.00, we decided to use a 5-day moving average for an “all-clear,” which occurred on Jan. 31. 

As such, a VIX close above 18 would be a warning of an imminent spike in volatility. If the VIX’s 5-day moving average moves back above 18, one might see the volatility shorts begin to cover, and higher volatility may be around for a few months. 

CoT chart MMO March 11

VIX chart MMO March 11

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