S&P 500 Futures; Reversing the Reverse

on July 27, 2015

The old saying that what goes up, must come down, applies. Sure I called the rally, and after the big rally I said the ES could trade down to 2095, and it did, but I have to be honest, Friday’s weakness was extreme and caught me off guard.

Sometimes there are just a few moving parts in the S&P, at other times there are many, and somehow the S&P’s list of moving parts got a lot bigger fast. Be it gold on a new 5 year low, or silver on a new 6 year low, or crude oil down to $47.70, or the weakness in the biotechs, the S&P has reversed its reversal in short order. The big question again, is this just another S&P ‘shake and bake’, or are the markets setting up for a larger move down? One of the things I have said many times over the last 6 to 8 months is, how many times can the S&P sell off and come flying back up? We all know that since the end of the 1st quarter there has been non-stop MOC selling. That is a big shift for the past several years when there was non-stop MOC buying, and it’s a clear indication of liquidation. But that selling has been going on for almost 4 months, whereas the recent pickup in commodity selling began only a few weeks ago. I also have told you many times about the PitBulls warnings about the Dow Jones Transportations (DJT), that when it’s weak there is reason to be concerned.

With the DOW and S&P plus or minus 3% for most of the year, it’s a different story for the DJT, which is now down -11.68% year to date. Last week I was talking to a floor trader from meats, and in the discussion, I said that the liquidation in commodities would be bad for stocks, but behind all the gold, crude, and grain selling, it’s clearly showing you where the weakness stems from, the DOW JONES TRAN AVERAGE.

CHINA SHARPEST DECLINE SINCE 2007

There have been quite a few flip flops, or what we call ‘false starts’ this year, but the most recent ones have been extreme examples. The speed of the rally after the Greeks credit crisis was a powerful rally, but the current sell off, backed by the weakness in China, has the S&P heading south again. Last night the Shanghai Composite (SHCOMP) declined the most since 2007, its second straight loss, and worst loss since Feb 27 , 2007. China’s leading index is down 28% from its June high, but still up 6% from its recent July 8th low. Many are starting to think that support from government funding is unsustainable, and that China is willing to let the markets fall to ‘test’ whether the market can support itself. Local trading firms in China estimate that the state owned fund, called the China Securities Financial Corporation, has spent billions of ‘yuan’ trying to support the markets. Many traders do not think the Chinese will just let the market fall, and expect the government to support the market over the next few days.

TROUBLED WATERS

In conclusion, the markets are looking shaky this morning. While I was updating the OP, the ESU15 sold off down to new lows at 2064.50. In addition to all the moving parts, the Fed will also be holding its 2 day meeting this week. Janet Yellen has remained firm in her stand the there will be a rate hike this year. When you combine all of the above with all the selling going on during the 2Q earnings season, and the PitBulls warning about the a high being made on the third Thursday in July, and increased volatility until the third week of August, things are getting off to a spooky start this morning. And lastly, I want to remind everyone that reads the Opening Print that “I am a bull but I ain’t no fool”. If the markets are going up or down, I want to go for the ride. Six years into the bull market, troubled waters seem to be coming our way…

SHANGHAI COMP. -8.45%

In Asia, 10 out of 11 markets closed lower (Shanghai Comp. -8.45%), and in Europe 7 out of 10 markets are trading modestly lower this morning. We have a much busier economic schedule this week; 16 economic reports, 2 day FOMC meeting, GDP, and 10 T-bill or T-bond auctions or announcements. Today’s economic calendar includes Durable Goods, Dallas Fed Mfg, and a slew of earnings from LECO, NSC, CR, ROP, BIDU, EMN, HAE, TEN, HIG, RMP, SFG, TMK, SWN, UDR, WCN, RCII, WRB, OMI, and SWFT.

Our View: The S&P futures go from up 8 in a row, to down 4 in a row. The sea change has been fast and furious and it doesn’t look like it’s over. One of my concerns is an old concern; how many times can the ES sell off hard and go flying back up? ThePitBull said on Friday he thought we could go to 2040. I had the first part of this right on Friday, and wrong in the second part. The problem Friday was, the ES never bounced until late in the day when it rallied 9.5 handles into the close, and is down 10 handles at 2067.50 on 190,000 ESUs traded on Globex. Our view is more of a feel than a view or call. I think the ES bounces off the open and then sells off again. I personally want to get a look at how the futures are trading before I buy or sell this am.