“Trump and Dump,” “profit taking,” call it what you will — Thursday marked an unwanted subpoena of sorts for bulls. On the session the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) fell by a relatively menacing 0.54% while affording a different type of reaction to “Dow 21,000!”
Wednesday’s cheers turned into modest jeers Thursday as a bubbly four-month long rally saw the bulls’ or maybe one big cat’s, tail squarely between its legs. More on that in a moment. At the end of the day, literally and figuratively, the broader market pullback which reconnected in an uglier way with “Dow 21,000” could still be described as modest.
Modest? It’s relative of course. But given a 15% gain since the presidential election, historically low volatility and a lofty market multiple that’s hard to justify, other than with the belief this time is different — modest does seem an appropriate description of Thursday’s action.
Beyond wondering how Dow 21,000 will ultimately fare given the consensus has finally pledged allegiance to a more presidential-sounding Trump on the heels of Tuesday’s Congressional pep talk, Friday offers investors a couple scheduled items that could prove to be market movers.
At 10 a.m. EST the ISM is set to release its services index for February. The forecast calls for a flat reading of 56.5 compared to January. And at 1 p.m. EST Federal Reserve Chief Janet Yellen will give a highly anticipated speech at the Executives’ Club of Chicago. I can hardly wait.
iShares MSCI Emerging Markets Indx (ETF) (EEM)
In Thursday’s session, the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) saw some unusually heavy spread activity, though some of the volume may have been the result of a ‘fat fingers’ trade.
The EEM has been showing signs of relative weakness over the past week after hitting a two-year high last Thursday. And now, one or more traders appear to be betting a more substantial decline is still forthcoming.
During the first half and with EEM trading at $38.17, 28,600 June $43 calls and June $36 puts traded. Most likely, the position is a protective collar hedge against much larger declines.
Alternatively, a fence position could be responsible for the heavy spread volume. A fence uses either a long put and short call combo or the other side of that position and amounts to a bearish or bullish directional bet with no offsetting stock hedge. Our guess? I’d probably lean towards the former and a bearish bet.
A second spread involving the March $37.50/$35.50 puts was also put up in size later in Thursday’s session, though some of the action may have been accidental and cleaned up.
Prints suggest a 1 x 2 ratio spread executed 25,000 times may have been swapped out for a vertical as 25,000 of the March $35.50 puts traded a couple hours later. The activity could be interpreted as a penny fix on the earlier 50,000 March $35.50 puts which crossed the tape as part of the 1 x 2 spread.
Caterpillar Inc. (CAT)
One bearish catalyst behind the quick about-face and test of the Dow’s newest key psychological level was constituent and machinery giant Caterpillar Inc. (NYSE:CAT), which clawed into a few bulls Thursday.
Shares of CAT sank by 4.28% to $94.36 and single-handedly helped bulldoze 30 of the Dow’s 112-point decline. The price drop marked Caterpillar’s largest single-session plunge since last summer in the immediate aftermath of Brexit.
Behind Caterpillar’s slide, government agencies raided the company’s Illinois headquarters as part of a probe into potential tax improprieties by one Caterpillar’s Swiss-based subsidiaries, Caterpillar SARL.
Snap Inc (SNAP)
Elsewhere, one spot where the market did show some snap, crackle and pop for investors was Snap Inc (NYSE:SNAP) which debuted on the NYSE Thursday.
The hyped-up parent company of Snapchat, the blink-and-you-missed-it mobile photo messaging sensation opened at $24 a share. As the most anticipated IPO since 2014’s Alibaba Group Holding Ltd (NYSE:BABA), investors enthusiastically bid shares 41% above the $17 initial public offer.
Our thoughts? Take a quick pic of SNAP right now. With a lofty market capitalization in excess of $33.4 billion, having raised more than double all the VC-backed tech companies in 2016 and priced at nearly three times the size of Twitter Inc (NYSE:TWTR), that type enthusiasm could quickly disappear.
As of this publishing, investment accounts under Christopher Tyler’s management do not maintain positions in any of the securities or their derivatives mentioned. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.