Stocks Plunge Following A Horrific 30-Year Bond Auction

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#Stocks – $SMH

#Macro – $SPX, #Rates,

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Stocks fell today as the call wall at 4,400 continued to provide meaningful levels of resistance, which is kind of sort important. Becuase over the past few days, as the call wall has offered a very strong level of resistance, the zero gamma level, which is kind of like support, or maybe a floor, has been moving higher. Today, the S&P 500 flip level, according to Gammalabs, was at 4,360, and the index fell below that support level to close at 4,347. This means if everything remains overnight and levels don’t change in the morning, that tomorrow the S&P 500 will be back in negative gamma, and that could add a lot of volatility to the market.

What sparked the selling was what I have been talking about all week: the Treasury auction that came today at 1 PM ET. The 3-year and the 10-year auctions went well earlier in the week. The 30-year auction is another story and appeared to me at least to be even worse than last month’s disaster auction. The rate was trading when issued at 4.716%, and the high yield was priced at 4.769%, which is a massive tail. It was not good.

Then, to add to it, of course, was that Powell reiterated basically the same message as last week, but today, the mechanics of the market were positioned differently, and so the different outcome.

This could be nothing, or we could see the market bounce back tomorrow. But still, the call wall is likely to still be at 4,400, so even if it does bounce back tomorrow, where’s it going? Additionally, if it did flip back to negative gamma, volatility could rise and push prices down.

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Also, now that the pattern appears to have been completed into a cup with a rising handle, my guess would be that we retrace the entire rally last week and work to fill the gap at 4,115. Becuase at this point, the pain trade to me doesn’t seem to be higher, but lower. Because the vast majority of investors are expecting and positioning for a year-end melt-up.

We also got a big bearish engulfing pattern today on the S&P 500 and the NASDAQ 100. These patterns don’t always work, but they certainly worked back on October 12 and July 27. It didn’t work so well on August 24.

The 10-year today survived a really big test; it was at a level that had to hold, and it did.

There appears to be a 2b Top that has formed in the SMH ETF. What makes this even more interesting is how it extends all the way back to mid-September, too. What’s ironic here is that this pattern, if correct, would suggest the SMH returns to its October lows. Why is this ironic? Because the pattern in the S&P 500, which appears to be entirely different, suggests the same outcome.

Have a good one!


Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment. 

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