The futures markets can stay irrational longer than most can stay solvent
Even the most bearish of the bears couldn't have predicted the bloodbath we've seen in the equity index futures markets since posting a August 18th high. As experienced futures brokers, we've lived through the 2008 financial crisis, the 2010 flash crash, and the August 2011 Federal budget crisis collapse; however, we've never seen a sell off quite like this one.
It is no secret that the U.S. equity markets were in desperate need of a "good" correction. In fact, many very smart (and otherwise successful) traders lost a lot of money attempting to time the down-draft. Nevertheless, it is difficult to rationalize this type of quick repricing in the absence of substantial changes in fundamentals. We certainly agree that the China story is worth monitoring, and will be a drag on the global economy but the truth is the U.S. economy only relies on exporting for 10 to 15% of GDP.
The futures markets are ultimately driven by people, who are driven by emotions. Once the panic and the margin calls work their way out of the system, we suspect the e-mini S&P futures will recover sharply into year end. With that said, bottoms are a process...and they are messy. We'll likely see a retest of yesterday's flushing low, or moderately lower (1800ish), before real buying comes into the ES futures contract.