S&P 500 Futures; Beware of Buying the Falling Knife

VIX

Things are starting to heat up. Crude oil is trading at a 6 ½ year low, continued liquidation in stocks, and bonds moving higher. Yesterday the S&P futures (ESU15:CME) opened lower and then got hit by a very large sell program that pushed the futures all the way down to 2067 before bouncing all the way back up to the 2093.00 area after Bloomberg leaked the Federal Reserve Minutes. After the 25 handle rally, the futures sold off before and after the 2:45 cash close, and the 3:15 futures close, down to the 2072 area. It was a wild day of swings and volatility.

GLOBAL LIQUIDATION

We knew going into the day that Asia closed mostly lower (Nikkei -1.61%), and that several of the big European broses like the CAC, DAX and FTSE were trading lower, but as the early sell program in the S&P progressed you could not only see the liquidation, you could feeling it. While all the global indices took big hits, CAC -1.75%, DAX -2.14% (down 1,800 points from its high this year) and FTSE -1.88% (under 6400 for the first time in a year and a half), the losses in the US were not as severe, DOW -0.90%, S&P and NASDAQ both down -0.80%. That said, the overall price action in the index markets was some of the weakest we have seen in a very long time with many of stocks in S&P now down 10% to 50% from their respective highs. Crude oil fell 4%, gold gained 1%, and the US 10 Year yield fell to the lowest level since May. There is little doubt that things are starting to unravel.

BLOOMBERG FED MINUTES LEAK

The S&P had an uneasy feeling to it going into the 12:45 release of the July Federal Reserve Minutes that showed that some fed officals were still undecided on whether to raise interest rates in September. The S&P futures (ESU15:CME) were weak going into the minutes, but after Bloomberg released the minutes early, the futures took off to the upside trading all the way up to the 2093 level. You could see the rally had exhausted itself and sellers came right back in force. The odds of a rate hike in September fell from an 85% chance to a 35% possibility that the Federal Reserve will raise interest rates in the December meeting. Around the 2081 level, I thought the ES could bounce, and it did, but as the 2:45 cash close neared and the MOC came out showing sell $740 million, the futures actually upticked, but then got crushed all the way down to 2072 – 2073 on the 3:15 CT futures close. In terms of the day’s overall trade it was a busy day. In terms of the S&Ps overall tone, it was a very ugly close.

CATCHING A FALLING KNIFE

I told the MrTopStep collective, and the PitBull, yesterday that buying the filling knives has not been as easy as it used to be. At several points during yesterday’s trade it felt like the ES could just keep going down. The global growth outlook for profits is looking very dim, and it really feels like the S&P is starting to lose momentum. In the past I had had no fear of stepping into a decline and looking for buying opportunities but there seems to be some type of shift going on and I could see it yesterday when I tried to pick some bottoms when the S&P was going down. Buying the falling knife has been a big part of how i trade the ES but with the wider ranges and increased volatility it seems to be getting to be a very dangerous approach.

In Asia, 10 out of 11 markets closed lower (Shanghai Comp. -3.42%), and in Europe 11 out 12 of markets are trading lower (DAX -1.22%). Today’s economic calendar starts with San Francisco Federal Reserve Bank President John Williams speech, in Jakarta, Jobless Claims numbers, Philadelphia Fed Business Outlook Survey, Existing Home Sales, Leading Indicators, EiA Natural Gas report, 2,5 and 7 Yr-Note Announcements, 5 – Yr TIPS Announcement, and earnings from HPQ, GPS, CRM, JKS, ROST, BONT, BRCD, CATO, INTU, BKE, SHLD, KIRK, TFM, PERY, NDSN, MRVL, TECD, MSG, SSI, TTC, SMRT, RGS, CYBX, SCSC, MENT, ARAY, RENN, OSIS, AMWD, NWY, CRMT, TUES, UEPS, and LANC.

Our View: There are a lot of moving parts right now, and it may be a good idea to start buying gold and silver. I know that is very out of character, but if the S&P actually does start going down hard, the metals will rip. There were big downside volume in the ES yesterday, and the algos were going nuts. I am concerned that a larger slide may be coming. Asia and Europe are weak, and the global markets do not care about the options expiration, but I get the feeling there could some type of bounce again today, but the ES is closing in the sell stops under 2050 that go all the way down to 2038 initially.

S&P Cash Study for the August Options Expiration

In Asia 10 out of 11 markets closed lower: Shanghai Comp. -3.42%, Hang Seng -1.77%, Nikkei -0.94%
• In Europe 11 out of 12 markets are trading lower : CAC -1.17%, DAX -1.20%, FTSE -0.50%, MICEX +1.03%, at 6:00 am CT
• Fair Value: S&P -3.50. , NASDAQ -2.24 , Dow -33.60 .
• Total Volume: 2.28mil ESU and 7k SPU traded
• Economic calendar: John Williams speaks in Jakarta, Jobless Claims numbers, Philadelphia Fed Business Outlook Survey, Existing Home Sales, Leading Indicators, EiA Natural Gas report, 2,5 and 7 Yr-Note Announcements, 5 – Yr TIPS Announcement

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