The S&P 500 is getting absolutely crushed as we write this 2 hours before the close on Monday. The CME E-mini futures just bounced from a low of 4212 – a decline of 4% from yesterday’s close and 12% from the highs on January 4. We’ve seen this kind of price action before and know that we are witnessing either 1) a capitulation where the weak hands (newly minted retail investors) get washed out of the market or 2) the beginning of a collapse that will take the S&P much lower than most believe is possible.

There are arguments to be made for both scenarios. Retail presence in the market is responsible for a lot of crazy price action. (Rivian going public at $78 per share and running up to $130 on the first day of trading comes to mind.) Many of these investors are young, addicted to Reddit, and have never seen a correction like this before. A 12% collapse in just 20 days hasn’t happened since the 2020 Covid collapse. Today’s relentless downward action certainly feels like a capitulation.

Data Source: Reuters/Datastream

Capitulations are often followed by huge “up” days that fool folks looking for hope. This is particularly true in bear markets. They say bull markets climb a “wall of worry” and bear markets decline on a “slope of hope.” A big bounce in front of or as a reaction to the Fed’s meeting tomorrow would be confirmation that today’s action is capitulation. The S&P 500 has not declined 20% yet, so we are not in a bear market. However, failure of the market to bounce significantly from here could mean we are well on the way to one.

E-mini, S&P 500 futures closed below the 200-day moving average on Friday for the first time since the beginning of the Covid collapse on February 27, 2020 and look poised to do so again today. This morning’s decline also took out old swing lows of 4260 (marked as a “key level on the chart above.)

Take Some Cash Off the Table If You Can

What’s it going to be: capitulation or collapse? We won’t know until the market tells us. It looks like capitulation right now. E-mini futures are now 100 points off their lows and 50 points higher since we started writing this. The March E-mini 4100 / 3800 bear put spreads we suggested buying for $950 or less in late December are currently trading for $3,000. Consider exiting half of your positions for $2,500 or more if you own more than one. Hold the balance for a move lower. Prices are changing rapidly so contact your RMB Group trading professional for the latest.

Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping our clientele trade futures and options since 1991. RMB Group brokers are familiar with the option strategies described in this report. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com.  Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”

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The RMB Group

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