Yesterday was a brutal day for the market, blasting through my first downside target of 10,000 on the Dow Jones Industrial Average and closing right at (just one point above) my second target of 1040 on the S&P 500. (To be clear, I didn’t come up with the 1040 number; it’s well-known as critical support in that key index.)

Early this morning, S&P 500 futures had traded up about 7 points, with Dow Jones futures trading much of the morning up about 55 points.

However, at 8:15 AM Eastern Time, ADP released its private survey of employers for June, estimating that only 13,000 private jobs had been created during the month. Bloomberg’s median estimate was 60,000 with a low estimate of 23,000.

Stock futures sold off immediately and, as I write this about half an hour before the market open (and 45 minutes after the ADP report), S&P futures are up only 50 cents and Dow futures are up 7 points.

Current futures pricing implies a “cash” S&P 500 price just under the critical 1040 level, all the more critical because so many people know about it.

Most commodities have drifted slightly lower over the last 45 minutes as well, with gold dropping about $5 and oil dropping about 50 cents.

In other words, ADP seems to have reminded early morning traders that just because the market is a lot cheaper than it was 24 hours ago does not mean it’s cheap.

To me, today seems likely to be volatile and crazy, probably with more downside risk than upside potential. It wouldn’t surprise me to see them push down through 1040 (roughly 1036 on the futures) and smack the market down a quick 100 Dow points or more, maybe 10 S&P points. We could see a little short covering and then they’ll test 1040 on the upside (though maybe not until later in the week) and that will then become a key test. My guess is that it fails the first time and that we end up in a trading range between 9300 and 9800 on the Dow for a little while.

[One quick technical note: For those of you who are unused to seeing a particular futures price imply a higher price in the actual index, i.e. 1036 in the futures roughly equaling 1040 in the cash, that is a function of “negative cost of carry” for the underlying group of stocks.  In other words, during dividend season, the dividend payments on owning the stocks exceed the interest cost of taking money out of the bank to buy the stocks – not hard to do in a near-zero interest rate environment.  Therefore, owning the stocks gives you a positive cash flow that you don’t get if you own the future, causing the future to be worth less than the stocks.  As we go through the dividend season and the companies go ex-dividend, the fair value on the futures will rise relative to the stock price, at some point actually going over the cash.  In other words, when there are no more dividends (or only very small dividends) to come before the futures expiration, then the future will be worth more than the cash.  And of course, at futures expiration, the future price and cash price converge.]

It would be interesting to me if this happens because many months ago, when we were coming off the market lows and had recovered to about 9000, I said I thought the market’s fair value was going to be about 9500 for quite some time. The market went MUCH higher in the interim than I expected – which isn’t much different from being wrong, I suppose, but if we do indeed get back to that 9500 range for a while I’ll feel somewhat vindicated. It would be better if I had made more money, however, which is more important than being right. Markets are not about egos, at least not for long because markets always win.

This is a market for traders, not investors. And again, if you want to buy something, I suggest selling out-of-the-money puts into major volatility spikes or at least covered calls which are really the same thing, except that people tend to think of selling puts as selling low strikes whereas selling covered calls involves buying stock and selling high strike calls. In either case, you’re really selling puts, just of different strikes. (There are small differences between selling puts and selling covered calls in terms of risk related to interest rates and dividend changes, but in this environment of very little change in either, those differences are negligible for relatively short-term options.)

If you sell puts, you MUST be prepared to take delivery of the stock. If that’s going to happen and you really don’t want the stock – and a lot of people are certainly scared out of taking delivery because by definition the stock has gone down – then you’ll have to buy the put back, perhaps for a loss, or else take delivery and then sell the stock out, perhaps for a loss. Alternatively, if your investment thesis for the stock is still in place, it might not be a bad plan to take the stock and then sell calls against it in what should still be a high implied volatility environment. Again, this is not a trading style for a novice or someone with very low risk tolerance, but it can be a successful approach.