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Stocks Dive On October 11 As Market Dynamics Change Rapidly

Stocks Dive On October 11 As Market Dynamics Change Rapidly

Posted October 12, 2021 at 9:56 am
Michael Kramer
Mott Capital Management

Stocks – DIS, JPM, MU

Macro – SPY, VIX, Oil

Stocks started the day higher, but that didn’t last for very long, with the S&P 500 finishing the day lower by almost 70 bps closing at 4,360, erasing that big rally we had last Thursday while filling the gap. The S&P 500 is in a clear downtrend at this point, and there is no denying that with each high lower than the previous. The only thing left to be seen is if the next low is lower than the last. For that, we will need to break 4280; I don’t think that will happen tomorrow, but I think it will happen over the next few trading sessions.

The market mentality has changed; it is just that simple. It is not the same market it was before September; the tone has changed.

S&P 500

One such thing that has changed is the VIX. It moved up today back to around 20, after testing the lower end of its range around 18.5. Those waiting for the volatility sellers to come back may have a problem because it doesn’t look like they are coming back anytime soon. You can really see this on the SKEW chart, and perhaps I pointed it out here or not; I can’t remember. Anyway, on October 5, I noted in an RTM member article that I thought this time was different, noting all that tail-hedging that the SKEW index represents had topped out at the same time the VIX bottomed. It seems highly likely that the short-dated at-the-money volatility sellers were using out-of-the-money options to hedge against their short volatility positions. But if they are not shoring volatility anymore, then there is nothing to hedge, and why the SKEW index has remained lower during this period of time.

Skew Index

So if the Vol sellers aren’t coming back, then the real risk here is volatility to break out to the upside. There are plenty of reasons for that to happen. The first being increasing uncertainty around earnings. I noted that 25 is the break-out point on the VIX. I think that is still the level to watch on the VIX.

VIX

Oil

Meanwhile, oil is at a significant inflection point here at $82. This is the trend line that goes back to 2013 highs. If oil breaks out it could go substantially higher, perhaps to around $91. The weekly chart shows that oil is overbought here, and if the dollar keeps rising at some point, it will put the breaks on oil’s rise. This will need to be watched closely. So have my doubts it can keep pushing higher, but I also said that at $76.

Oil

JPMorgan (JPM)

Meanwhile, the banks were the worst-performing group today, dropping by 1%. Now JPMorgan reports Wednesday morning, and the price action today was curious, with the shares falling 2.1%. Now the stock is up a lot going into results, and as I noted yesterday expectations are very high for these banks. The market seems to be saying expectations are too high now. I could easily see this stock falling back to $153.

JPMorgan

Micron (MU)

I’m so tired of Micron already. Why can’t it just break support and start heading lower already?

Micron

Disney (DIS)

Disney is kind of in the same boat as Micron. Just hugging support now for months, with all of these open gaps at much lower levels that need to be filled.

Disney

Originally Posted on October 11, 2021 – Stocks Dive On October 11 As Market Dynamics Change Rapidly

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