Even the bulls can’t believe the S&P 500 futures (ESM16:CME) are within spitting distance of 2100.00. It doesn’t seem that long ago that the S&P was ‘retesting’ the August 25 lows and making a 1802.50 low back in mid February. Like the August sell off, the S&P could not have looked worse. Remember how weak China and Europe were? The VIX traded all the way up to 53.29 and the S&P was down around 15% from the all time highs. The world was coming to an end, or that’s what we were led to believe.
Fast forward ten weeks, the benchmark index is within five handles of 2100, and 1.5% from testing the contract high made in May 2015. The bearish sentiment which began last year has done nothing but provide ammo and fuel for a move higher as “no stops go untouched in the S&P 500.” Yesterday’s close was the highest for the S&P 500 futures since December 4th, and this mornings 2098.50 high is the highest print since December 2nd, the last time the futures traded above 2105.
Along the way we noted how suspect this rally has been, given the global uncertainty and declining fundamentals in the United States, but the methods of the bull run from recent years has continued to ring true, “buy the dip!” While we acknowledged the concerns of this rally, we have also continued to remind traders that this tape is so hard to fight, and the path of less resistance has been to buy the small dips rather than short the rips higher. Statistically and logically there was every reason to believe that 2000 was going to be heavy resistance, but we also noted that bearish sentiment was much stronger than at anytime since 2011, and that was our single reservation for calling a market top. The personality of these markets have been to screw as many people as possible, and at this point, until the bullish bus gets too full, the buy stops are going to be run as they squeeze out the few remaining bears before reversing.
I was talking to a well known money manager yesterday and he mentioned to me how everything he learned while earning a graduate degree in economics is useless now and he wishes he had studied psychology. He said that in economics, the theories that are taught are definites, but these theories do not work in the trading world, where the markets can be so irrational. It was John Keynes who reminds us that “The market can stay irrational longer than you can stay solvent.”
Another successful trader I spoke to has found himself on the wrong side of the market since the February 11th low, and he added to his short position from 1805 all the way up to 2000, a very smart guy blowing up an account in the process. He saw the negatives of the global situation, and being an idealist, believed the markets could only go down. Now as they go up he get’s angry and says the game is rigged. I can’t argue that the game is rigged, but we can at least see this develop and be on the right side of that rigged market. The market requires more than a scientific and idealistic view, otherwise you will remain entrenched in a valid view that is costing you trading losses. Traders need an artistic side, similar to my gut feel approach along with scientific/logical views. It’s a left brain/right brain approach working together, otherwise even our gut feels without logical precedence may lead us astray. My other friend was right, as a money manager, understanding psychology is far more practical than an economics degree.
In Asia, 9 out of 11 markets closed higher(Shanghai Comp +0.30%), and In Europe, 11 out of 12 markets are trading higher this morning (DAX +2.10%). Today’s economic calendar includes Housing Starts, Redbook, and a 4-Week Bill Auction.
Zero Rates and VIX 13.00
Our View: The ESM16 traded all the way up to 2098.50 on Globex. The Hang Seng index closed up +1.30% and the DAX is up over 2% this morning. The CBOE’s VIX traded down to 12.98 yesterday. What more could the bulls ask for? There is little doubt that the VIX is helping the oil and stock market move higher. Today’s economic calendar is light on eco reports and long earnings reports. There seems to be no end in sight. The ES is just 1.5 handles away from 2100.00 and the NQM15 is only 20 points away from 5600.00. The rally has been a stunning example of catching traders off base. Our view is to sell the early rallies and buy weakness. The first time above ES 2100.00 should see some type of selling.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 out of 11 markets closed higher: Shanghai Comp +0.30%, Hang Seng +1.30%, Nikkei +3.68%
- In Europe 11 out of 12 markets are trading higher: CAC +1.00%, DAX +2.10%, FTSE +0.37% at 6:30am CT
- Fair Value: S&P -6.49, NASDAQ -8.57, Dow -86.50
- Total Volume: 1.4 mil ESM and 6.5k SPM traded
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