Wednesday, October 15, 2014

Ebola Fears

This is now turning into an Ebola selloff.  The fear of uncertainty over Ebola and how it is expanding, although only 2 people infected so far, is driving the selling.  It is a bit irrational, but when the selling avalanche arrives, it rolls on until all the sell stops are hit, panic sellers taken out, and we reach a level where buyers are willing to step in for value.
We are getting very close to that value buyer stepping in, as the market is coming up on SPX 1850 support.  Yesterday, even as the market was rallying, it felt more like eager bottom pickers stepping in rather than motivated buyers will to take long term positions.  Thus, you have the daily afternoon selloff which spoiled the bottom pickers' plans.  After the carnage over the past few days, a gap down on Ebola fears is a gap down to buy.  You have the Ebola theme stocks, LAKE, APT, etc. gapping up on the Ebola news.

It is a big red herring, but it is convenient for the headlines to blame the selling on Ebola.  But the real factors are options expiration related, as the delta hedgers, and the short put crowd have to scramble to reduce risk and sell futures to hedge.  That makes it difficult for a sustained rally this week, due to opex.  Once we get past Friday, you will see a market that is no longer burdened by put sellers capitulating and we should embark on a healthy rebound.  Until then, sell the rallies, and only buy big dips.  Sell ES 1880, buy ES 1860 for the day.


Anonymous said...

Do you think subsequent SPX recovery is V or U-shaped? Coz I am small and cannot monitor too closely...

It seems bottom is near. Tech stocks are getting more resilient.

Market Owl said...

I am betting on a V shaped recovery, but with SPX 1850 going down so easily, the next reasonable level of support is 1815-1820.

Today does feel panicky, but with options expiration forces at work, you can see selling beget more selling.

I agree, I believe bottom is very close.