Liquidation Mode: For How Long?

By Danny Riley

Things have gone from good to bad to even worse. True to form, the SPZ and the ESZ took out Monday's low and ran the sell stops down to 1402. The S&P futures closed down 23.3 handles or 1.4%, the NASDAQ closed down 26.5 points or -0.9%, crude oil slipped to a 3-month low closing at $86.67, down 2.3%, gasoline closed lower for the 9th day in a row, the Euro closed down 0.6% and commodities have sold back off where they were in July. Add that on top of the global stock market slump and a batch of negative earnings and it was one early sell program after another.

The weakness started in Europe and was helped lower by Alfa Laval AB and DuPont. Alfa Laval, the world's largest maker of heat exchangers, said demand in the fourth quarter may be slow and DuPont posted a smaller than expected profit and said it was cutting 1,500 jobs. All the major indices opened sharply lower and sold off. For weeks analysts have been giving stern warnings about the 3rd quarter earnings falling short, and in the last few trading days several big names have fallen way short of expectations. As of the close, of the 145 companies that have reported in the S&P, 60% have missed analyst sales estimates.

Liquidation is being seen in almost every sector. The Dow closed down over 200 points for the second day in a row and had its largest 2-day drop in almost a year. The Dow's 243-point drop was the largest single loss since June. The NASDAQ closed at its lowest level in 2-1/2 months. There is no doubt that the soft earnings have affected the markets, but there is also no doubt that some of the big investment firms are selling, the question is how long will it last? Currently the premium between the S&P futures has been stuck at sell program levels for over a week. Every early and late day short covering rally has failed and with every new low and bounce there is a new set of sell stops.

Monday           Oct. 15      SPZ +14 handles
Tuesday          Oct. 16       SPZ +13.7 handles
Wednesday     Oct. 17      SPZ +7.9 handles (1457.10 settle)
Thursday         Oct. 18      SPZ -5.6 handles
Friday              Oct. 19      SPZ -27.5 handles (1424.00 settle)

As we said, things have gone from bad to worse, but in the S&P you just never know when they are going to throw the switch the other way. Right now the bears are winning, but that doesn't mean it will last forever.

MrTopStep.com exclusive:

NEW RULES FOR PROTECTING CUSTOMER FUNDS

Nearly one year after it was discovered that MF Global had used customer segregated funds to pay off big trading losses, regulators have moved this week to tighten up restrictions and adopt new safeguards to protect client money.

The Commodity Futures Trading Commission (CFTC) voted unanimously to propose new customer protections aimed at initiating new internal controls that would close the loopholes and force firms to provide more disclosure to their customers. The new rule may become effective in the next several months and comes after the industry suffered one of its biggest crises of confidence, the fall of MF Global.
Gary Gensler, the CFTS' chairman, said, “It is critical to enhance customer protection; we must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.”

In an effort to advance the new rules, Gensler, who is a Democrat, called a public meeting for later this week to force the Republican commissioners to cast a vote, but in a surprise announcement on Tuesday all five commissioners voted to propose the new rules. The new rules will reverse over 100 years of self-regulation and implement new rules to protect the customer funds.

Over the last year there has been a public outcry to enact new rules, but the collapse of Peregrine Financial Group and the misuse of over $200mil in customer segregated funds by its owner Russell Wasendorf Sr., helped fast-track CTFC commissioners to initiate the new rules as quickly as possible. The CFTC's plan tracks a proposal outlined in July by the National Futures Association (NFA). The group, now armed with the agency's support, would move to close a major loophole that permits firms to spend some money belonging to customers who trade abroad. The new rule would strike down the exemption, known as the “alternative calculation,” which contradicts a cornerstone of the industry to always segregate client cash. Under the plan, futures firms must also turn over to regulators daily reports that calculate segregated customer balances. Additionally, new rules would be set to raise the standard for how regulators examine brokerage firms. The proposal is part of a broader effort to help restore credibility to the industry.

JUDGE DISMISSES MF GLOBAL EMPLOYEE LAWSUIT

NEW YORK - A judge on Tuesday dismissed claims MF Global's trustees fired employees without proper notice but left the door open for former employees to file an amended complaint against the bankrupt brokerage's parent company.

Lawyers for the trustees of failed futures brokerage MF Global Inc and its parent, MF Global Holdings, argued that they were not subject to the Worker Adjustment and Retraining Notification (WARN) Act, which requires employers to give notice of mass layoffs, because liquidating companies are not considered employers. U.S. Bankruptcy Judge Martin Glenn agreed with that line of reasoning. That makes Giddens a “liquidating fiduciary” not subject to the requirements of the WARN Act, Judge Glenn concluded, dismissing the complaint against MF Global Inc “with prejudice.”

Several of MF Global employees filed the lawsuit last year, saying more than 1,000 workers were fired without warning shortly after the firm's October bankruptcy filing.

The collapse of MF Global one year ago was due to its exposure to risky European debt, leaving customers with a $1.6 billion shortfall in their accounts. The firm collapse has pushed regulators to come up with new rules to protect customer funds from ever being used that way again.

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/#vid-top

Our view:
Volume jumped in the ESZ yesterday up to 2.3mil contracts traded. Some of the indicators we look at are approaching oversold levels and are nearing defined support levels, suggesting probabilities are increasing for a rebound rally. Also supporting this is a very low level of institutional hedging. In other words, the S&P is oversold and nearing critical support. That doesn't mean that a retest of yesterday's low can't take place, but we are starting to get the feeling that the ESZ may be nearing a level that it could bounce from. As always, keep an eye on the 10-handle rule and please use protective stops when trading.

It's 5:30 a.m. and the ESZ is up 3 handles at 1409.75, crude is up 15 cents at 86.82 and the EC is trading 1.2943, down 36 ticks.
In Asia 7 out of 11 markets closed lower (Shanghai Comp. +0.07%, Hang Seng +0.31%).
In Europe 6 out of 12 markets are trading higher (CAC +0.38%, DAX +0.02%).
Today's headline: “U.S. Futures, Stocks Gain as Commodities Rebound”
Economic calendar: Today: Weekly mortgage apps, new home sales, FHFA home price index, oil inventories, 5-yr note auction, FOMC mtg announcement; earnings from AT&T, Boeing, Bristol-Myers, Delta, Eli Lilly, Akamai, Symantec, Zynga. THURSDAY: Durable goods orders, jobless claims, Chicago Fed nat'l activity index, pending home sales, Kansas City Fed survey; earnings from Altria, AstraZeneca, ConocoPhillips, P&G, Aetna, AutoNation, Credit Suisse, Dow Chemical, Pulte, Sprint, United Continental, Apple, Amazon.com, Coinstar. FRIDAY: GDP, consumer sentiment, Windows 8 released; earnings from Comcast, Merck.

VOLUME: 2.3mil ESZ and 14k SPZ traded
SPREADS: SPZ/H spreads traded (none)
FAIR VALUE: S&P +4.00, NASDAQ +8.00

Moody's downgrades five Spanish regions, reports of Bernanke walking off the job in January 2014, Richmond fed down .7 vs exp .5 and even more earnings disappointments sending the spoos sharply lower premarket. Yes, there were some ok earnings too, but this quarter missing hurts more than beating helps. 3M's earnings were up 6.7%, but DuPont's earnings were down 98%. Xerox's fell 12%. Whirlpool's fell 58%. UPS' earnings were down 56% and revenue fell too. So, the theme continues regarding the continued, slowing growth over the last couple of months along with the outlook going forward being guided lower, indicating that the QE stimuli has shown little in the way of progress so far. Of all the headlines crowding the Dow Jones Broadtape this morning, the one that stood out to us was this one: “United Parcel Service: Uncertainty Around Magnitude Of Holiday Shopping Season” WSJ reported. However, the UPS was trading up 3% as the DJT's were enjoying a walk through the park up 30 points while the DJIA was off over 200 points and the spoos were down 20 handles. There was some chatter on shipping AAPL products, but the airlines and freight companies have been raising fees, indicating a stronger chance of averting a recession. Flash PMIs are are on tap, along with Draghi speaking in front of the German parliament to explain the new OMT policy announcement in an effort to put out any internal fires and of course the FOMC announcement is tomorrow.

Morning observations: On Mondays rally into the close, apparently CNBC's Bob Pisani was reporting a rumor that the Fed would raise its QE level at this Wednesday's meeting as well as extend the 2015 language. Today, Bill Gross tweeted: “Fed may shift from ‘extended period' language 2 nominal GDP target or something close. If not 2morrow then Dec. Would be reflationary” the only thing that matters now is election and fiscal cliff as the sluggish and unresponsive to the stimuli, QE 1, 2, or 3 economy gets kicked down the road.

elway: the wizard of west wood (not me) says close above 1413 ensures restest of 1428 in next 18 hours but with china pmi, fomc that is not hard to see just may have more when most of the muppets are sleeping

MrTS video: http://www.mrtopstep.com/10-23-2012-george-dowd/

Tuesday started with 420k ESZ and 1.9k SPZ traded on Globex, trading range 1411.00 – 1433.25 / Monday's RTH's, pit range was 1430.60 – 1417.00, settled at 1430.10 up 6.1 handles. The RTH's gapped 17.5 handles lower to 1412.50 – 1412.60, traded 1413 and down went the equities to a low of 1402.20 by the time the dust cleared. There was a brief bounce from 1407.50 up to 1412 area at 9:05CT, but 1402.20 was trading by 9:40 on a pickup in volume as more sell stops and sell programs hit. From there, the spoos stepped back up to the globex low of 1411 by 12:00 as the world was waiting for the AAPL announcement. 1411 Dec = 1418 Sept (old bracket 1416/17 highs). AAPL was trading $629.30 at the onset of the unveiling followed by $633.90 before backing off. Srosen (13:05:05): WFC announces another 200mm shares added to their buyback – temporarily popped the Fins as AAPl was trading $623 down $10 and falling as the $329 iPad mini price tag was initially rejected – $618 held. After holding the 1407 area the spoos were retesting the open range by 1:45 and by 2:00 was trading into new highs at 1414.20. After the high the SPZ slowly drifted back down to the 1407.00 area just before the 2:45 cash imbalance. At 2:45 the imbalance showed a very small $35M to sell. The SPZ traded back up to the 1409.50 area, traded 1408.30 area on the 3:00 cash close before settling at 1406.00 on the 3:15 futures close, down 23.3 handles on the day.
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CONTRIBUTORS' CORNER

SPX CHARTS

Roger Volz, BGC Partners

BGCFutures Levels for Today

*Glossary on bottom

SP1 “bull trap” on the close; pattern of lower highs & lower low defines down channel around 1412 in intraday charts with the July breakout line around 1380 providing strong support=> Inside Range1405 / 1427.50; Outside Range 1398 / 1441; 1419.50 Trading Pivot today

ND1 negative consolidation sitting on H/S measurement / Aug breakout and 200 day SMA; cracks 2652 for continuation risk to 2610 => Inside Range 2610 / 2708, Outside Range 2520 / 2753 ;2652 Trading Pivot today

Russell 2000 bleeding < 89-day SMA next in series; channel support 805...798 convergence is next accelerator => Inside Range 805 / 826.50, Outside Range 775 / 841.50

VIX higher lows test first convergence 18.00; next at 19.00 for acceleration to 20.75; support gathering 15.35

Gold risk off retest lows; sub 1733 opens risk to 1718; daily charts in defensive pattern with ST SMA rollover => Inside Range 1718 / 1783, Outside Range 1718 / 1783

CL1 (Crude Oil) retest higher low for now leaves negative consolidation pattern 87.75 // 89.35// 90.58

Inside Range

· Represents intra-day momentum gain/loss

· For example, if the upper bound of the Inside Range is 1427.50, one can trade short against it/use this area as a stop and vice-versa

· If level is broken (sustained 5 minute move at a minimum, not quick spike up/down), it then typically becomes support/resistance for the remainder of the day

Outside Range

· Represents short-term trend changes

· If broken, the current trend may be in the process of reversing

· 2nd Outside Range (applied if needed) may be in play for a true trend reversal

SP 500 Futures 120 Min Chart and Indicator….globex dive on Bernanke jitters probes the September breakout line at 1411.90 …..leaves series of lower highs. Immediate risk opens to Aug Sept lows at 1397.50-1394.80

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DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may. in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.

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