The S&P hugged the lows of yesterday for the majority of the day in a mostly quiet session.

S&P 500 Intraday Range

Quiet as it seemed, there was a pick up in volume in both the S&P e-mini contract (machines) and the pit traded contract.

S&P 500 - Daily

Poker

When I left off on my poker analogy, the market called my re-raise after the flop. I stated that I would call the market, no matter what the turn card. The turn card was dealt yesterday and the break lower showed a pick up in volume. Along with the pick up in equity volume, the credit market confirmed what it had been hinting at all of August. Credit spreads widened across the board, most notably in the financial complex.

Waiting for the turn card was the tough part. I have now bet the size of the pot and I await the market’s reaction. Based on today’s action, I’d say the market has not reacted much. It is still staring down at his cards. So far the only tell is the pick up in volume in the S&P futures contracts today.

I stuck to my plan when the turn card was dealt by buying puts in a range of asset classes and calls in 10 year Treasuries. From a chart perspective I see potential resistance in the 10 year above the 120 mark.

Treasury Futures

Gold

Gold traded strong today and was up the most it’s been since March. Depending on where the trendline is drawn, some may declare it an official breakout. Some time back, I sold my gold positions. Last year, when the flight to safety trade gripped Wall Street, gold traded much lower–as low as $680 per oz.

In light of that, I am going to see if gold can surpass the $1,000 mark–and the subsequent reaction–before I am tempted back into gold futures. For now, the physical gold that I hold in safe haven countries around the globe will suffice.

Gold

Slowly but surely, cracks in the foundation of the market are appearing and confirming themselves. If volatility is to make a sudden move higher, I am positioned well.

As I wait for the market to react to my bet, I will seek out the important tells and communicate them as best I can.

That’s a Rap.

Peace. Out.

On the first day of the ninth month of 2009, US stocks sold off on an increase in volume. The $VIX was up 12%, the dollar up .74% and the mighty five (AIG, FRE, FNM, CIT, C) we’re all off double digit percentages, save Citibank who fell 9.20%.

Several rumors made the rounds today, which were quickly denied. The most timely denial came from the CEO of Wells Fargo (WFC). With about nine minutes of trading left, he came over the wire to reassure the world that the bank will not raise equity in order to repay TARP. Further, he said that when TARP is repaid it will be done in a friendly way and will not dilute holders.

Traders in the pit quickly laughed off the headline and sold Spooz futures into the cash close–and then some in the final fifteen minutes. Just how Wells will repay $25 billion dollars in a friendly, non-dilutive way remains a mystery.

Wells Fargo - The Timely Denial

Another rumor today was the possibility of a large bank default. As I noted on Twitter, if there is to be a default of a large bank, it is  likely a bank in Europe. Default swaps on US financials traded higher last month. Swaps on European banks traded even higher.

No matter, risk (volatility) continues to be underpriced. Some simple regression anlysis on the VIX shows that it is peeking out past the standard deviation models which options are priced. Today was the busiest day of trading I’ve had in a while.

I’m out for now. Time to hang out with Pinky.

The VIX

The S&P (SPX) had a range bound week. Over the past month, widening spreads in the credit market have hinted that big money is attempting to position for a breakdown.

The most difficult trades are when you fade an existing trend. If you are short here, you are fading the uptrend that began in March. Given the magnitude of the gains since the March lows, the crowd is programmed to buy any sell-offs. In July, sellers emerged, but they were overwhelmed by buyers. The market has run higher ever since. When sellers re-emerge, buyers could become overwhelmed and a more vicious sell off will ensue. When the inevitable sell off arrives, I will be observing the intensity of the selling. If the selling is fierce, then the pullback will likely evolve into something more substantial–perhaps more substantial than anyone is prepared for.

The biggest trade of 2009 may yet be upon us. Only time will tell.

Last week's range - 60 minute chart

S&P Daily Chart

After closing at 1025.20 on Friday (21 August) the S&P (SPX) futures have been in a holding pattern. Perhaps Thursday’s GDP report will be the catalyst for a move out of the range. The anticipated number is the preliminary number for the second quarter ending June 30th. GDP is reported 3 times for each quarter: advance (reported July 31 at -1.0%), preliminary and final. The estimate for the preliminary number is at -1.5%.

Number nine, number nine
Industry allows financial imbalance
-The Beatles, Revolution 9

As repeatedly noted, the number 9 is one of significance, and there have been historic market events in the years ending in the number 9.

The ninth month of 2009 is approaching. It is no accident that The Beatles are releasing their digitally remastered catalogue on 9-9-09.

As Jeff Cooper points out, the S&P topped on October 11, 2007. In March of this year, it found support at 666. The March low was 666 days from the October high.

Number nine, number nine
Industry allows financial imbalance

Timing Is Everything