All eyes are on Deutsche Bank and Turkey this morning.  It’s been a while since I calculated wipeout ratios [see: Banks’ Wipeout Ratios], but DB is in worse shape than any of the other banks I looked at last year, with the possible exception of Goldman Sachs.

Deutsche reported OTC (not total) derivatives in its 2015 annual report of €41.9 trillion, about $47.3 trillion in USD.  With Tier 1 capital of  €48.7 billion, this works out to a multiple of derivatives to Tier 1 capital of 861, or a wipeout ratio of approximately 0.11%.  In other words, a minuscule 0.11% decline in the value of DB’s OTC derivatives portfolio would wipe out all of its Tier 1 capital.

Like every other bank, they’ll tell you the exposure isn’t that great, that almost all of their positions are offset by other positions — what they call “netting.”  Of course, we learned from Lehman, AIG and Bear Stearns that netting out the exposure for balance sheet purposes isn’t the same as eliminating the exposure.

Turkey’s downgrade…what can you say?  Turkey’s a perfectly nice country with lovely people…and, an evil crackpot at the helm.  As we discussed in July [see: Turkey Sinks to New Lows], this was only a matter of time.

This latest action, however, will turn the markets on Erdogan.  With no one to bully, hold accountable or throw into jail until he gets his way, this will cost him dearly.  Unfortunately, it will be the citizens of Turkey who ultimately pay the price.

With the futures off 10 points and USDJPY and CL testing support again, one gets the impression that the rally is hanging by a thread.  That might be a slight exaggeration – but, only slight.

continued for members…

The gray channel can sustain a 10-pt drop to, say, 2155 before things get a little dicey.  The gray channel is messy, so we might do better to focus on the SMA10 at 2148.21 or a TL from the Sep 14 lows that indicates 2151.

The bigger picture:

Note that CL is popping a little, but not whole hog just yet.

While, USDJPY is merely loitering near support.

ES came very close to its red .618 this morning, so might be headed back to 2144 or, of course, its own SMA10 at 2140.48.

UPDATE:  9:39 AM

Just tagged that TL at 2150.71.  I’d start looking for a bounce, especially with the SMA10 just below.  Seems a shame to get all the way down here and not tag it.  But, we’re going to need CL and USDJPY to settle a little lower and VIX to run up and tag its SMA100 at 14.5.  It’s actually difficult to accomplish, as everyone and their mothers are expecting a big bounce there.  Who wants to sell here?  Unintended consequences of BTFD mentality…  Note that new home sales are coming up at 10AM.

The others…

UPDATE:  9:59 AM

Covering the short here at 2150.49, as SPX seems to be inching back up and CL isn’t letting up at all.   Most troubling, VIX is sliding.  Probably a little early, but rather that than getting caught in a bounce.

10:00 AM

New homes sales beat estimates (609K v 585K exp), but median prices were down 5.4% and sales up 20.6% from last year’s.  It’s a beat, but the price drop has to be concerning.

I would remain on the sidelines, as the SMA5 10 is fast descending towards current prices.  It could provide another little drop down to 2148.21.

It’s worth noting that VIX never did reach that SMA100, and it’s approaching support at the white channel top and its own SMA5 10 at around 14.  A bounce there up to 14.5 might facilitate SPX’s SMA10 tag.

UPDATE:  10:11 AM

Back to short here at the SMA5 10?

UPDATE:  10:15 AM

I’d try re-shorting here at the red midline at 2155.35, but with tight stops.  CL is spiking and VIX broke down below the white channel top.  Again, we’ll target 2148.21.  I don’t really have a strong feeling about it, one way or the other.

Note that if the SMA10 can’t hold, the falling white channel midline is at 2142.37, also the .618 retracement of the rise from 2119 on Sep 12 to 2179 on Sep 22.  It’s also the red channel .236 line.  And, the bottom of the red channel itself is around 2135.

TL resistance for ES here…

UPDATE:  11:34  AM

Probably close enough.  Covering here at 2148.38, as ES just tagged 2140.

CL looks unsure of its next move……while, USDJPY continues to sag.  So, my impression is SPX isn’t out of the woods just yet.  The 2142 tag still seems a possibility.

UPDATE:  12:30 PM

I’m going to take a quick break.  SPX is trying to get its footing here on the SMA5 10/20, but USDJPY and CL aren’t looking very constructive.  I’m comfortable on the sidelines, but would love to short on any drop through 2148 for 2142 or 2135.  However, I suspect VIX will take another run at the white channel top around 13.70 when the SMA5 50 arrives.  And, CL should have no trouble zipping up to its SMA100 at 46.22 if it gets the call.

UPDATE:  1:24 PM

SPX keeps slipping lower, along with USDJPY.  VIX continues to edge higher, and NKD refuses to break out.  It appears as though they’re going for a 2142.37 close — just very, very gradually so as not to disturb the passengers.  I’d take a short position here at 2149.36 with tight stops and see if it plays out.

It’s possible that they’re going to all this trouble just to tag the SMA10…it missed it by .07 earlier.  But, I seriously doubt it.  I think we’re heading lower, with 2142.37 as the initial target.  It’ll bring today’s dip to 1% — IMHO a rather mild outcome given the headline risk we’re facing.

UPDATE:  3:30 PM

After all this time, SPX is starting to ramp higher now???  Back to cash at 2148.64.  I’d keep an eye on it, though, as it could well be a head fake.

UPDATE:  3:36 PM

Back to short at 2149.13.  It was a head fake.

Now, if VIX can just resist the urge to collapse for another 24 minutes…

As we head into the close, I’ll pass along the usual admonishment.  Only hold short if you can hedge or handle the thought of a gap higher.  While this certainly looks bad, it would surprise no one if the ECB or German gov’t came out after the close and announced a stabilization facility or some such crapola for DB.  Otherwise, I’d cover at the close or at 2142.37, which ever comes first.

UPDATE:  4:00 PM

Must have been quite a few shorts zeroed in on 2142.37, because SPX started dipping in the last minute, only to bounce back in the last 2 seconds as it became obvious we wouldn’t reach it.

VIX behaved itself… …while, USDJPY closed at its lows of the day……and, CL still tacked on 2.68% despite its plunge in the last few hours.