S&P 500 Tumble Pressures Important Support as Liquidity Makes for Sloppy Conditions


S&P 500, Liquidity and Volatility Talking Points:

  • The Market Perspective: S&P 500 Choppy Range Between 3,910 and three,650
  • A cost within the VIX volatility index shadowed the S&P 500’s practically -3.0 % drop to Thursday’s low
  • While there have been some basic sparks, the slide and supreme strain on the SPX’s midpoint of its October to December vary is being distorted by vacation liquidity

Recommended by John Kicklighter

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The S&P 500 appears to be main risk-leaning belongings to defy the standard Santa Claus rally and cozy fade in volatility which can be often ascribed to this time of yr. In truth, what we’re seeing could also be a extra direct reflection of the liquidity situations which can be typical across the vacation interval. At the low of the day, the S&P 500 index dropped as a lot as -2.9 % from Friday’s near noon trade. For the emini futures contract, with its longer buying and selling session, the peak-to-trough (from pre-exchange morning trade) was a -3.3 % drop. Market conditions-wise, that could be a vital transfer that appears to defy the time of yr. Fundamentally, there have been just a few basic handholds for the dealer that completely wants a purpose might seize onto: headlines round China struggling to take care of a surge in Covid instances as it loosens quarantine and US main indicator information from the Conference Board that feeds into the not too long ago dormant recession considerations.

The technicals are in all probability what drew probably the most consideration for the lively dealer contingent nonetheless. In the sharp decline on the day, we’ve got a powerful reversal from ‘previous support as new resistance’ across the 3,930-15 zone and greater than cowl what was possible thought-about the sensible vary by way of the shut of the week. In the warmth of that transfer, the S&P 500’s tumble pushed it by way of a confluence of technical ranges that offered a significant help. For the index, the midpoint of the October to December vary stands slightly below 3,800. In shut proximity to that very same degree, there are the 38.2 % Fibonacci retracement of the post-pandemic March 2020 to December 2021 bull wave and the 38.2 % Fib of the August sixteenth to October thirteenth bear wave. There is sufficient overlapping density right here to extend consciousness and weight for a help on this space such {that a} break reads as extra conviction than we might suppose possible in these markets. That mentioned, this doesn’t essentially register as a break of conviction. With ramped up volatility and thinned liquidity, the power to show markets on a dime at technical boundaries diminishes.

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Change in Longs Shorts OI
Daily -7% 0% -4%
Weekly -2% -7% -4%

Chart of S&P 500 Emini Futures with Volume and 100-Day SMAs (Daily)

Chart Created on Tradingview Platform

Whether there may be going to be a real Thursday break or not issues much less in regards to the index shut relative to the technical benchmarks. A break is a draw for most merchants as a result of its implications for observe by way of. And, it’s going to nonetheless be exceptionally troublesome to override the dimming outlook for participation heading into this weekend. Holiday situations will naturally cut back participation within the market from giant retailers that abide market holidays and day without work for its staff. That will limit a big phase of funds accessible for lively turnover by way of these final 5 official buying and selling days for the US exchanges. Looking to historic norms, the VIX volatility index sometimes drops by way of this (the 51st) week of the yr and we’re at current defying that norm. We will see the place it ends by way of Friday’s shut. Yet, even in historic examples of counter-trend exercise from the previous, the ultimate week of the yr is much more constant in seeing the numerous drain.

Chart of VIX Volatility Index and USDJPY with 20 and 60-Day Correlation (Daily)


Chart Created on Tradingview Platform

On the liquidity versus volatility equation, it’s nonetheless vital to watch the scheduled and unscheduled occasion danger forward that might cost acute volatility that disregards technical boundaries – however that’s once more impossible to search out observe by way of on condition that absolute closure of markets for the weekend. There are not any crystal balls, so we will’t know what the unscheduled updates can be, although the unresolved considerations round price hypothesis, recession and China’s struggles might definitely be affordable flashpoints. As for the macroeconomic docket, just one occasion on the calendar stands out to me: the Fed’s favourite inflation indicator, the PCE deflator. It’s skill to faucet into one of many key themes of 4Q 2022 is with out query, however it’s going to possible require a major shock to ignite this late into the vacation fade. An distinctive shock to the upside would probably the most problematic consequence for these in risk-leaning markets. Though, that appears inconceivable given the tendencies in inflation and the change in CPI every week again.

Calendar of Macroeconomic Event Risk Through Week’s End


Calendar Created by John Kicklighter

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