The Ticker District

BK: Will the Banks Break the S&P 500?

By - - Market Sentiment & Uncategorized on October 14, 2016 10:11 AM Follow-Ups img_2788.jpg

Will the Banks Break the S&P 500?

Last evening on the Big Show called Fast Money, the indomitable Carter Worth presented the compelling case that the S&P 500 may be technically broken. BK’s bearish bias is well documented and Carter’s words were music to BK’s ears. But BK is always on guard against his own confirmation bias and he defers to the market as the final arbiter. One of my trading assumptions is that both the bull and the bear case exist at the same time and it takes new information to shift the probable outcomes toward either side. So what’s the new information today? Bank earnings.

This morning, JP Morgan reported earnings that have been heralded as “blowout” and “easily topping estimates”. A major driver of the earnings was a huge uptick is capital markets activity, especially fixed income trading. As of this writing, JP Morgan equity is up 1.4% in premarket trading and the S&P 500 futures are up 10 pts. It appears that JP Morgan has shifted the probabilities toward the bull case. That is to say that earnings will continue to improve, especially if the FED raises rates. 

Of course if the FED does indeed embark on a rate hiking cycle, the US dollar is likely to move higher and have a contractionary impact on the global economy. If this occurs then the bear case would be the most probable outcome. The bear case is that a slowing global economy and strong dollar will be a drag not only on multinationals but also commodity producers and ultimately the US consumer.

So what’s a confirmation biased trader to do? Defer to the market.

In his “testimony”, Carter Worth cited the break of a trend-line that has been in place since the February lows. Link here for those who have trouble seeing the chart –> 
As BK sees it, the most bearish thing that could happen today is that the banks report good earnings and the stock prices close on the lows of the day. To be clear, I have no idea if this will happen – I am simply laying out one scenario. To that end, BK will not only be watching how the banks trade but also how the S&P 500 closes.

In particular, BK will be watching for a break of the trend line that Cart Worth highlighted on a closing basis. Chart here

What’s interesting is that even with the bank fueled rally in S&P futures this morning, the trend line drawn using closing prices is still broken. For now, BK sits like a spider – waiting for something to stumble into his web.  

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Dan: Remember what you are celebrating – $SPX

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This is Part of a 3 part Debate on Market Sentiment