The markets go up, and the markets go down, and when the Federal Reserve declined to raise interest rates the S&P 500 futures did just that. They sold off after the announcement and then they rallied. After the major averages fell 10% in the first month and a half of 2016, the S&P futures are now at their highest level of the year. As we have said many times the extreme volatility that started in the beginning of 2016 is far from over.
Yesterday was another choppy day going into the Fed announcement, but after the policy statement was released, equity markets went bid and pushed above the 2020 level before closing at 2016. Overall, the statement was more dovish than what most analyst had anticipated, as the Fed has begun to recognize that there could be some serious problems looming.
Bring On The Quad Witch
When this week began, the potential for volatility was strong. The mid-month rebalance on top of other factors, such as some numbers out of China, the Bank of Japan’s schedule, and the Fed’s two day meeting, followed by a policy statement and press conference, combined with the quarterly quad expiration, seemed to offer so much opportunity. Now that the equity indexes have moved past most of the noise, the ESM16 is sitting just +0.33% from Friday’s close in what looks to now be the slowest week in months in terms of trading range, which has been less than 30 handles as of yesterday’s close.
The cash expiration study shows the Thursday of the March Quad Witch up 23 of the last 31 years. When combining this with March 17th, which has been one of the top five strongest days of the year over the last 15 years, and the fact that St. Patrick’s Day is historically strong, the historical calendar today is very favorable for bulls. Friday’s expiration week calendar is up 17, down 14 the last 31 years, closing the weekly stats modestly.
Overnight, the S&P futures continued their run up from yesterday making a new high of 2027.25, just .33% from going positive on the year. However, later this morning the markets turned lower, selling 21.50 handles down to 2005.75. We have said that 2000 was a price magnet, and did think that after the Fed meeting there would be a clear path to either 2050 or 1950, but for now the futures remain stuck in the middle.
What Next?
Our friend Chad Gassaway noted that the S&P 500 performance on FOMC tends to be modestly bullish since 2015, and the days that follow tend to provide weakness, especially when looking two weeks out, as the last eight FOMC announcements have resulted in a lower benchmark index two weeks post-Fed Day. This month, the post-Fed calendar also coincides with the post-expiration calendar, which has tended to suggest weakness into the month’s close following the expiration week; and at the very least, gains have often been limited for the week or two proceeding from OPEX. This chart below shows several of the expiration week highs marked by red arrows since July of 2014. The chart also shows how the S&P made an all time high last summer, then went into correction mode and made a lower high during the impressive rally in the fall that, as shown yesterday, very much resembles the current rally. During the rally late last year, the index placed a lower high on the long-term chart, something that was very atypical since the March 2009 low. The relevant question now is will it make another lower high? If so, it should be between the current price and 2050.
Last year the S&P was unable to hold above 2100 and met much resistance above 2050. There is no reason to believe that sentiment will be any more optimistic this year with recession fears, the election and central bank concerns greater than last year when the markets were still in ‘buy every small dip mode.’
While we support the notion that a higher low will be made, and weakness will soon be entering the major equity index markets, we still believe that any selling will be limited. At the end of the day, we must face the fact that volume is slowing down, and the seasonals are rather fair in April. The most likely outcome we see is a range bound market over the next month, similar to last year’s, during which the tight range traded for several months. There likely will not be much to give conviction to either bulls or bears until the summer when the primaries have passed and the focus becomes centered on the Presidential election, as well as the Fed, which still anticipates raising rates two more times this year. Many commentators, as well as the Fed Funds Rate futures, show a likelihood of this occurring during the Summer. Once the market enters into “sell in May,” anything could happen; and if by that time bulls have not shown the ability to take this market higher, then the path of least resistance will be to test, and to likely exceed, the February lows.
In Asia, 9 out of 11 markets closed higher (Shanghai Comp +1.20%), and In Europe 10 out of 12 markets are trading lower this morning (DAX -1.75%). Today’s economic calendar includes Weekly Bill Settlement, Jobless Claims, Philadelphia Fed Business Outlook Survey, Current Account, Bloomberg Consumer Comfort Index, JOLTS, Leading Indicators, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 10-Yr TIPS Auction, Fed Balance Sheet, and Money Supply.
$41 Oil?
Our View: While everyone was tuned in on the fed and the big rally in the S&P, oil ripped to nearly $41.00 a barrel last night, and the VIX traded down to its lowest level since December. At the end of the day there is no patting myself on the back. I said we would rally last week, and this week, and we have. I said a week ago Tuesday the next handles 50 handles in the ESH16 would be up, and when the ESH sold off last Thursday down to 1965 after running up to 2000.00, I said I was ‘sticking to my guns.’ Like the markets or not. it’s not hard to see money moving back into stocks. With all the QE going on around the world and bad markets in Asia and Europe money is flowing back into the US. Then you take the seasonals, and up the markets go. Our view is unchanged, we still think higher into the March Quad Witch but we have also met our upside objectives, and like the upside buy stops, the downside sell stops are starting to build up.
As always, please use protective buy and sell stops when trading futures and options.
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MrTopStep Group
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