The First 1% down day in the S&P 500 since October 11th.

Finally, we are seeing the equity market correct. Traders have been waiting months for this, but I doubt it was everything they had hoped for. Although it is a relatively decent one-day sell-off, today's action was meaningless in comparison to the post-election night rally. Further, selling was orderly and without panic. The good news is, the market is looking healthier. Corrective trade is "normal" and should be expected. As crazy as it sounds, the market needs to be bearish before traders can get comfortably bullish and buying picks up.

Today's shake-up is being blamed on yesterday's Congressional hearings and today's uncertainty regarding Thursday's health care vote in the House. The Republicans claim they have the 216 votes necessary to pass the bill, but some last minute amendments are raising concerns.

As we've been stating in this newsletter, the markets had priced in political perfection but governments are designed for flawed operations (checks and balances). The financial markets could get rocky as the new administration attempts to administer change.

Historically FOMC minutes have been an afterthought, but in today's climate they are a big deal to futures traders

The futures markets have been hanging on every word that trickles from the mouths of Federal Reserve members. Even off-handed comments made on their personal time have been moving through the grape vines.

Today's FOMC minutes didn't offer any surprises. The Fed feels like the U.S. economy is moving in the right direction, which justifies a rate hike. But overseas market turmoil (namely China) has them pressing pause. The market seemed to like what they heard.

In more bullish equity market news, the Chinese stock market opened for trade today after being closed for an entire week in observance of a national holiday (this is odd to us because it is essentially illegal in the U.S for the stock exchange to be closed more than 3 consecutive days). Once the bell rung, Asian traders bid prices higher to catch up with the global equity market rally that had taken place without them.

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.

For Futures Traders, the Countdown to the Fed is on

Six days from now we'll finally find out whether or not the Fed believes initiating a rate hike is a good idea. The investment community is polarized by the debate, and it seems the Fed might be too. We are still of the belief that they won't be looking to make any moves until the October or December meeting (most likely December), but either way the impact on the economy will be minimal.

Even if they raise the overnight borrowing rate a full percentage point over the next year, funds will be historically cheap. With that said, we will likely see a knee jerk reaction to the first rate hike but that doesn't mean the actual value of financial assets have changed. More often than not, equity markets moved higher overall in the early stages of a rate hike campaign.

This is what professionals call a WTH market (the "H" stands for heck).

Markets undergoing vast changes in their technical outlook on a minute to minute basis are best described as WTH markets.  I have no doubt that investors who have been trained, and thus far rewarded, to "buy the dip" were putting money to work early this morning as the S&P 500 screamed higher, but I also have no doubt they are now remorseful buyers.

The market looked equally as horrible on the close as it looked fantastic on the open. In such markets, typical market analysis techniques simply don't work and traders attempting to chase prices back and forth will wish they had never heard of momentum indicators.

In the past, WTH markets have been followed by big moves so traders should approach the S&P with more caution than usual.

There is a lot of event risk floating around.

If it isn't Chinese tariffs, it is a Trump administration investigation or Russian/Syrian turmoil.  We've gone from a world seemingly without risks throughout most of 2017 and early 2018, to a world in which there are peripheral threats in every direction. That said, despite what it feels like volatility isn't as high as it could be. Although we are seeing large point swings in the stock indices, the percentage of the swings is relatively reasonable given the height of the market and associated risks.  Further, the VIX is relatively tame when compared to past volatility.  
Where the ES goes in the short-run is obviously akin to a crap shoot.  Nevertheless, looking back at historical patterns it is generally a poor idea to bet against the S&P 500 as it is trading in a trough ahead of earnings season; earnings seasons have a tendency to reverse trends.

The market is pricing in a good payroll number as it reverses pessimism over North Korea

Late Monday afternoon I was watching a business news station. The panel was discussing the implications of a North Korea missile being fired (they were still trying to confirm the rumor that it had occurred). There was talk of a limit down opening to the E-mini S&P (the news broke during the daily afternoon pause of trading). They were right about sharp selling on the open but the bearish tone was quickly forgotten by tax reform talk. Even a 500-year flood couldn't deter the fiscal policy bulls. By Thursday's close all of this week's bearish headlines had been forgotten.

Crude oil futures are driving the bus

Unfortunately for anyone holding stocks in their retirement portfolio, or anybody playing the long side of the e-mini S&P in the future market, stocks aren't trading on their own fundamentals. The broad market is simply following crude oil lower, and occasionally temporarily higher.

It is important to remember the last time crude oil traded near $30, the S&P 500 was near 1,100, and the world was concerned we would no longer have a functioning banking system. This time around, we are in a much different situation. Unless I'm missing something, it is far less dire (unless you are long commodities). Nevertheless, something has to come back into line. Either oil, and the other beaten down commodities need to make a move higher, or stocks need to move lower.

In recent days we've been "blessed" with some rather bold analyst calls in the commodity space. Some large and relatively well respected banks and analysts are calling for oil to fall to 20s per barrel, and in one instance expectations are for $10 crude oil!!! Perhaps these prediction will be accurate, but we have serious doubts. It smells a little like the widespread analyst expectations for $200 crude oil in 2008 when $150 crude oil was considered "cheap".