On Sunday night’s open, the S&P futures opened and traveled higher early in the Asian session, making a high of 1964.25 as Japan was opening up, then proceeded to travel lower and chop during the Euro session before opening the cash markets here in the U.S. Price traded down to Friday’s midday range before finding support there at the 1937.75 area, which in turn resulted in buying off the lows, taking price to a closing print of 1944.00, 20 handles from the globex high, and down 7 handles on the day.
The summer ended with a huge bang; the S&P 500 futures (ESZ15:CME) dropped from the 2100 area in the second half of August down to 1830 very quickly and violently, in a way that I have been saying that I have never seen before. Ever since then, although the weekly ranges have been less exaggerated, there have still been 20 – 30 handle moves in either direction that seemingly come from nowhere, move quickly, and don’t last long. Friday of last week I highlighted the recent pick up of algorithmic and high frequency trading activity, and as I have been saying for years, it’s only going to get worse.
Even as September opened, the first trading day was the worst start to a month’s open since 2011; and heading into the post-Labor Day trade, we expected that volume would return and price would move. Even the week before Labor Day, the J.P. Morgan analyst Marko Kolanovic predicted that the markets would see $100 billion of outflows post-holiday; and last week, Lipper reported the outflows in ETF and mutual funds at near record levels, all the while the CFTC’s Commitment of Traders reports were showing short interest at levels not seen in 15-20 years in the equity index futures. However, price is remaining calm and range-bound.
This week the Federal Open Market Committee (FOMC) will conclude the September meeting as many key analysts and banks have suggested that the first interest rate hike in years would occur this month. Whether they do it now or in December, or even next year, one thing we know is that the rate will not stay at the bottom for long. However, the markets are also still digesting the current events in China; and aside from what is going on in the U.S., it can be argued that the Chinese economic concerns are the most legitimate problem facing world markets at this time. Meanwhile, the U.S. is facing a key political season, as primary debates have begun and next year the U.S. will be electing a new president. All of this equates to what we call market uncertainty; and the markets do not thrive on uncertainty. The argument can be made to raise rates before the end of this year, which would provide for the new year to begin under new policy, and would conclude the initial rate hike before tensions are raised in a political year.
While price has remained relatively calm in September, one thing we know is that it will not last. After FOMC we prepare for “Spooky October” and a year-ending in which money managers have lost a bonus with the recent decline and could be aiming to take the markets back. At the end of the day, it’s too uncertain to predict price over the coming weeks and even months; but I have been saying that the markets will do whatever screws the most people, and at this point the perma-bulls have to be careful; but at the same time the overwhelming short interest has to also be nervous. As MrTopStep has been saying for the last couple of years, “I may be a bull but I ain’t no fool.”
Using the simplicity of technical analysis, it’s not hard to see that since the August lows, there has been a pennant forming on the S&P 500 futures. The nature of this formation is consolidation before breakout out and making a trending move. In essence, it’s the calm before the storm. Interestingly, as we approach the conclusion of FOMC this week, it’s notable that over the last two years, the index futures made a high on September 19th before traveling lower into month’s end and into October.
I noted for months how the 2100 pivot was a vital price magnet, and how volume would build beneath it and lose steam above it until eventually the volume built beneath it, but failed to send it higher. Very early in September I noted that 1950 was becoming the new short term 2100 as price had been, and still is, sticking to that pivot, with volume building beneath it while failing above it. This is not a particularly good sign. The more times that price fails on decreasing volume, the greater likelihood that when it fails again there could be a further leg lower. What bulls desperately need is to create a floor there, with the chance to build higher volume above, but for the time being, when it goes higher there is short covering but no real position buying.
It’s 6:00 am CST and the ESZ15 is currently trading at 1945.75. Last night’s Globex trade was one of the quietest seen in a few weeks as the S&P futures traded in just over a 10 handle range. Early in the Euro session, price did manage to take out yesterday’s lows by a few ticks, trading to 1935.75, but did rally quickly nearly 12 handles to 1946.75, while it now sits just ticks away from the overnight high as well as Monday’s high from the cash session of 1949.50.
In Asia, 8 out of 10 markets closed lower, and in Europe, 11 out of 12 markets are trading this lower this morning. Today’s economic calendar starts with Retail Sales, Empire State Mfg Survey, Redbook, Industrial Production, and Business Inventories.
Our View: While the ESZ15 did trade 1.57 million contracts yesterday, 350,000 of that came from Globex, and 600,000 came from the ESU15 / ESZ15 spread, that leaves 620,000 contracts traded in the day session with 70% of that volume going to program and algorithmic trading. In other words the ‘rollover’ is helping make for a very ‘thin to win’ type trading environment. Additionally, the S&P cash study (see all the S&P cash study stats here) for the September expiration shows a semi-bullish week. The other side of the coin is the Hang Seng Composite has fallen about 6% in the last two days and despite the S&P holding for now, there is still quite a bit of nervousness out there. Many traders think there is going to be a retest of the 1831 low, and to tell the truth I think that is a possibility, but I do think the S&P is putting on a good showing. Our view, keep an eye on the weakness in Europe and sell the early rallies and buy weakness.
- In Asia 8 out of 11 markets closed lower : Shanghai Comp. -3.52%, Hang Seng -0.49%, Nikkei +0.34%
- In Europe 7 out of 12 markets are trading lower : CAC -0.31%, DAX +0.04%, FTSE -0.11% at 6:00 am CT
- Fair Value: S&P -10.91 , NASDAQ -13.92 , Dow -110.34
- Total Volume: 2.46mil ESZ and 47k SPZ traded in the pit.
- Economic calendar : Retail Sales, Empire State Mfg Survey, Redbook, Industrial Production, and Business Inventories.
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