Tim Quast, Founder/CEO, ModernIR and Market Structure Edge.
#1 Morning Stock Show To Get You Ready For The Stock Market Open, PreMarket Gainers, Earnings This Week, Economic Data & More!
Benzinga PreMarket Prep 8:00AM ET- 9:00AM ET BenzingaTV on YouTube
#1 Morning Stock Show To Get You Ready For The Stock Market Open, PreMarket Gainers, Earnings This Week, Economic Data & More!
Benzinga PreMarket Prep 8:00AM ET- 9:00AM ET BenzingaTV on YouTube
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NewsTranscript
00:00 All right, Tim, let's take a look. Of course, the market was falling last week. We felt
00:05 like three consecutive days. Let's take a look at what is going on underneath. What
00:10 is the quantitative look here for the market? Because of course, if you just take a look
00:15 at the price action, I see people in the chat. Everyone seems like it just back to bear market
00:22 days. Let's take a look at what the stats are saying and how demand and supply adds
00:27 up here.
00:28 Yeah, if you're a part of the edge mob and you're new to it, you might say, well, broad
00:36 sentiment was rising and yet the market declined. So surely, the data must be wrong. And no,
00:44 it still gave us the central tendency. And that's the core thing. When I use that term,
00:49 central tendency, what do I mean? It's a mathematical term. What should be our general expectation?
00:56 It's not perfect. It is not precise, but it is a good way to think about the market. So
01:02 apologies, I had to reset this. So here's what I mean about the broad, the central tendency.
01:10 The central tendency is the green line. The central tendency is call it 88% of market
01:17 cap. It's roughly the S&P 500 SPY. But this green line is the composition of all the stocks
01:24 comprising the S&P 500 and their supply demand balance. All the buying and selling by investors
01:31 and traders normalized to a 10 point scale. And you can see what it's doing. So the central
01:36 tendency into options expirations, there's those little green squares that tell us options
01:40 are expiring, was up and yet the market was down. It is very similar really to what happened
01:46 at options expirations in September. But because this demand side was up, there was opportunity
01:52 every day to make money long. Every time the market pulled back the volatility of SPY,
02:00 which is about 1%, 1.1%. The underlying stocks are about 2.3% volatile right now. But you
02:07 could just think about it this way. The derivative SPY, the ETF tracking, the underlying stocks
02:13 is 1% volatile and the stocks themselves are 2% volatile. That's the trade. So if the broad
02:19 measure pulls back 1%, what is the probability intraday that it might get some of that back?
02:25 Well, with that uptrend in overall demand, very high. And I did it every time that opportunity
02:32 presented itself by trading SPXL. I'm not suggesting that you do that. You have to be
02:38 very confident in what the data are telling for you to do that. But it's an effective
02:43 way to produce short term returns. Each time you can produce 1% or 2%, take that money,
02:49 trade over, wait for the volatility to give you another entry point. And the way that
02:53 you know that that's likely to happen is the demand side. And if I scroll down, the supply
02:59 side. So I know supply is rising and demand has been weaker or supply has been shallower.
03:06 What happens when those things diverge? Well, you're going to get a trading opportunity.
03:10 The reason stocks didn't rise is options were expiring. All that implied demand, 20% of
03:14 it resetting. And you don't know exactly what's going to happen. But that's how I think about
03:19 it.
03:20 So this is a difficult day. In other words, once the options are gone here now, they're
03:24 gone. Obviously, we've had the third Friday here. So how do you approach the Monday morning
03:28 after the options are off the board?
03:30 Well, it's a very, very good question, Dennis. So new options trade today. So we're starting
03:36 over. And people who came through that lost money or made money. Global macro money that
03:43 hedges its exposure is going to increase or decrease or maybe it rolled its hedges. But
03:50 we don't know. And there are everybody, it could be you and I, selling volatility to
03:56 keep a premium. But there are big banks that dominate that market. Five big banks dominate
04:02 the market for derivatives. And so did they prepare properly? Will demand meet supply?
04:07 We don't know. We have to watch how that unfolds. I'll tell you something that concerns me or
04:11 has the potential to be concerning.
04:14 If you look at the last two times, here's August options expirations right there. And
04:22 demand was falling and supply was very high. And the market declined into options expirations.
04:29 Then supply came down because the banks knew there was an imbalance. So they short to cover
04:34 their own risk. Then as the new series trades, they cover and the market recovered and up
04:39 went in this case, SPY, but the whole broad market went up. Then we get to September options
04:44 expirations. Demand was declining. Supply was very high. Market plunged. And then everybody
04:51 covered. Now, where are we this time? Well, it's really interesting. This is the first
04:55 one out of three where demand is up, not declining. And that's in some ways worse. Because if
05:05 now demand declines and supply rises, we will add to the downside. I'm not saying that's
05:12 going to happen. The thing I'm going to watch is this. If the supply side declines, we're
05:18 fine. Probably the market slips a little bit, but then gets its footing. If it doesn't,
05:23 if this rises and demand falls, we could see the market take another step down. And I can't
05:29 tell you what it's going to do. I tell you, I have a short bias now. I will do the
05:35 opposite of what I did during options expirations, where if the market declined, I bought long.
05:40 Now, if the market rises, I'm going to do shorting because the central tendency here
05:46 tells me that we have just about, this is probably the peak. I mean, if you trend wind
05:50 that it would be tailing over. So I don't know what's going to happen. I'd be curious
05:56 what you guys think. But it's different than the last two times where the market bottomed
06:01 after options exploration.