What happens in Vegas…gets posted here

Anyone looking for short-term price volatility needs to review activity in the LAV (Las Vegas) contract over the last week.  Futures prices shot up 2-3 points after the Case Shiller release on Wed. Dec 26 as the LAV index posted the biggest gain (of the ten CUS components) with a 2.8% monthly rise from 97.38 to 100.14.

Then that night, when trading resumed, ten lots traded in the front contract (LAVG13) from 99.0 down to 93.6 over the course of 11 minutes.  All trades took place in the front contract even though calendar spreads would have suggested that certain longer expiration contract bids should also have been hit.

Within half an hour, the bid was back up to 95.6 and crept higher to 97.0 the following morning.  Today (Wed. Jan. 2nd) the LAVG13 contract is 101.4 bid (offered at 102.0).

I am puzzled as to what happened.  The LAV contract had open interest of 1 contract before Dec. 26th.  Night trading is noticeably thinner than daylight trading, and holiday weeks are typically less busy, so I’m not sure why someone would choose such an illiquid period to sell so many (relatively, given OI) contracts.   The ten lots traded in five separate trades so it’s not as if someone “fat-thumbed” one trade, and the order had to have been entered between the afternoon close and the evening open (a gap of 3 hours) so it was relatively fresh.  While many of the Feb contracts exhibit some negative seasonality, that is less so the case for LAV (and other warm winter states -see recent blog for a discussion of May seasonals https://www.homepricefutures.com/?p=2125)  Besides the seasonal factors are often smaller to underlying trends and the +2.8% monthly gain suggested to some that LAV was starting a (short-term?) rebound.

There have been traders who draw a line in the sand and demonstrate their willingness to sell relatively large size at a particular prices when the market reaches their levels (both in up and down markets).   I can recall at least two such incidents in the DEN contract over the last few years, but in those cases the trader maintained a fixed price.

It’s possible that someone entered a “Market” order instead of a “Limit” order and so any bids that showed up after the first trade got hit.  (Let me reemphasize that I would only recommend “Limit” orders on all housing futures to avoid situations like this -or worse!)

There may be other explanations for why someone chose to sell contracts ~6% lower than the previous night’s closing bid, but I can’t think of any good ones.

The current LAV futures front-month  contract prices, combined with the underlying CS index trend, makes the back-expiration LAV contracts some of the most challenging to quote.  (In this situation, bids typically rise by 0-2% HPA, while offers might be +10% YOY.  Compounding these trends for 3-5 years leaves extremely wide bid/ask spreads.)

This market is clearly conflicted (and this week’s trades didn’t help).  There are market bids that are consistent with gains over the next few years, but as I noted in the DB report that I highlighted last week https://www.homepricefutures.com/?p=2130, there are those that believe that the housing fundamentals in LAV remain poor.

Any help on quotes, further elaboration on fundamentals, and/or ideas on the last week’s trades, would be appreciated.  Feel free to contact me (johnhdolan@homepricefutures.com) with any thoughts.