Now that the Iranians have nuked the Geneva talks, over-sold oil will almost certainly catch a bounce on Monday. The tidal wave of oil money that sparked last week’s rally in stocks will flow back into the commodities market, and the already over-bought, and starting-to-roll-over stock market will plunge. And since all the shorts have been squeezed out, there may not be anybody willing to step up and buy. We might finally get the big wash-out that everybody had been anticipating.
The June decline was orderly because shorts were constantly buying-to-cover and taking profits each time the market dipped. A huge number of those shorts were burned off last week. So now the market is free to plunge. At a minimum, last week’s low should be tested.
As oil fell on Friday, tech fell harder, and that is why I put on a large short-tech play Friday. So, if you want to buy some QQQQ put options in a panic on Monday, don’t worry, I’ve got some to sell to you!
And I’m not alone either. As Jon Najarian reported on “Fast Money” Friday night, a gorilla bought 144,000 September $42 QQQQ puts in one trade on Friday – a ginormous trade. So, somebody huge is making the same bet that I am. Now, I have no idea who this gorilla is, but suppose you were running a huge fund and you decided to rotate out of your tech stocks and into health-care stocks. You know that when you start selling your techs you will knock the market down because you are so huge. So, why not buy a few puts and profit from your own selling?
Note: If you are not an options trader, you can still see this QQQQ put position by logging into your broker’s website and then looking at the September options for QQQQ. You will see that the open interest in the $42 puts dwarfs all the other strikes.
I must say that I am surprised by what happened in Geneva. These diplomatic things are usually decided in advance, with the actual meeting just a choreographed formality. But, as I have been saying, the Iranian government’s actions are somewhat lacking in rationality.
So now, instead of having a nice deal, we have a two-week deadline for Iran to knuckle under, which they have already said they will not do.
With the meeting ended badly, maybe the Iranians will go back to testing missiles. And also potentially affecting oil is Tropical Storm Dolly which will enter the Gulf of Mexico as the market opens Monday morning.
The S&P 500 is at the March-low resistance, and the VIX has fallen to its uptrend line which has triggered a plunge in stocks each time it has been touched during the past two months.
So, it looks like a perfect market storm is brewing for Monday. Perhaps there will be some other news before Monday morning to offset these factors, but don’t count on a miraculous over-night recovery of the futures like we had Friday morning. That was just the options elves propping up the market to save their options positions. None of the big players have to buy on Monday.
Note: You may want to watch C-SPAN Sunday night. The interview with Shelia Bair will be aired at 6pm. This is the one that caused the big sell-off in stocks Friday before the close when CNBC reported that Bair was training up an army of regulators to handle more bank-runs. Oddly enough, I anticipated this a week ago:
“I wonder what the capacity of the FDIC is? For example, how many banks could they seize in a week? Are they staffing up? What about the Fed? Won’t Bernanke need a whole new army of people to oversee all the new stuff he will be responsible for? Let’s hope there’s a Bureaucrat Boot-Camp somewhere training up a battalion of babycrats to man the trenches before things slip out of control.”
It looks like that is exactly what is happening.
Update: I just watched the Bair interview on C-SPAN (which was also aired at 10am.) While she was confident that the FDIC could handle the problem, Bair did indeed say that she was “vigorously beefing up staff” (9 minutes in) and that there would be more bank failures (28 minutes in). The FDIC is also building a new computer system and requiring banks to interface with it so that seizures of failing banks can be done more quickly and efficiently. Bair also touched her nose several times during the interview, which is a “tell” that she thinks the situation stinks.
Note: While oil can catch a dead-cat bounce off of the Geneva news, falling oil is actually a recession signal. Consider this quote from Barrons:
“The last time oil fell by 2% or more on three consecutive days from its year’s highs was in September 2000, which marked the start of a rocky patch and a year-long decline.”
…and a two-year plunge for stocks!