The world’s central banks have confirmed MrTopStep’s trading rule; ‘it takes days and weeks to knock the S&P down and only one to bring it back.’ This trading rule has stood its ground for a very long time, but it did not take weeks to knock the S&P down, it only took two days. The recent sell off and rally are a great example of the world of algorithmic trading and how the global banks work together to keep the markets from falling too far. The PPT, as it’s called in the United States, is now being established in almost every central bank in the world. When things get bad, just sell some more bonds and print some money, it’s just that simple…
Bears Take A Beating
As I have said many times over the last several years, we live in an ever changing world and an ever changing trading environment, and the markets are never going to go back to what they ‘used’ to be. When the Brexit vote went the other way, and the S&P’s fell, they did so because of one word; uncertainty. As we all know in uncertain times algorithmic and HFT trading volumes go up. These systems know when the markets are running scared and they fully take advantage of the uncertainty. The trading systems cause the markets to move further than they should in shorter time frames. Over and over again the S&P finds a reason to sell off but the power of zero borrow cost trade ends up dominating. After the 2007 Credit Crisis there have been hundreds of examples when the news was bad, the S&P sold off, got market participants to sell. Whether it’s a 30 or 40 point sell of,f or 100 handle or 200 handle sell off, the S&P regains its footing and moves higher. In most cases the sell off lasts several days to weeks but the rally back tends to be quick and sharp. That’s why it’s so important for the shorts to cover when the markets fall, because like Brexit there was every reason in the world to sell, and when traders do not take advantage of the lower prices they end up chasing the index higher once its start moving the other way. Last week there were a lot of comparisons to Brexit and the collapse of Lehman Brothers during the credit crisis. While I understand the ‘counterparty risk,’ Brexit just isn’t the same. Below is a story I pulled out of the Wall Street Journal. It goes over the differences but also point out the similarities.
Brexit and Lehman Brothers
Brexit isn’t the same as the collapse of Lehman Brothers, but the stock market is behaving similarly.
After Lehman Brothers fell over in September 2008, equities slumped, then rallied back to their previous levels within a week. Brexit isn’t Lehman, but the stock market is behaving similarly, writes WSJ’s James Mackintosh.
The S&P 500 remains a little lower than it was immediately prior to the British vote to leave the European Union, but it is already back above where it stood the day before that.
In 2008, shareholders made an epic mistake: They assumed Lehman would be manageable. This time the assumption is that central banks will ride to the rescue and corral any problems. Investors expect global easy money, adding yet another central-bank prop to the stockade protecting shares from weak economic growth.
The result is some unusual, and worrying, behaviour in the bond market.
- Since the Brexit vote, Treasury yields have tumbled, and they kept falling even as shares recovered.
- On Friday, 10-year and 30-year yields set new lows, as did British and Japanese benchmarks.
- Bondholders think central banks will worry about the economic impact of Brexit, keeping rates lower for longer.
- This is quite different from what happened after Lehman, when bond yields rebounded with shares, as bond investors made the same mistaken judgment that there would be few long-run effects from a midsize US bank failure.
Last week’s divergence of bonds and equities isn’t healthy. Bond markets are screaming that the world economy is slowing, and shareholders have their fingers in their ears singing “la-la-la I can’t hear you.”
In the end the world did not come to an end like most people were saying. The S&P sold off and the S&P rallied. Is it over? I do not think so but when I look at the S&P knowing it’s July and what happened last year around this time I get the feeling there are more up and downs coming. There is still a lot of uncertainty out there as the election approaches and there’s going to be a lot more. So the moral of the story is…lock the profits in when you get them and move on to the next trade.
2105 Globex
Early Monday morning the ESU traded up to 2104.75 and has been offered since then. This makes the second rejection around 2100 after Friday’s cash high of 2100.50. After a 125 handle rally in less than a week, we probably shouldn’t make too much of this, but now the ES has pulled back to 2081.00 this morning, giving the index a near 25 handle retracement. For bulls, they need to show that their momentum last week has the equity market secure in a dip buying mode. They can give some ground, but not much, and they need to hold the 2075 area. For bears, the ideal would be to keep the ESU at lower highs today and to start eroding away last week’s gains.
In Asia, 9 out of 11 markets closed lower (Nikkei -0.67%), and In Europe 9 out of 12 markets are trading lower this morning (DAX -1.40%). There are a total of 18 economic reports this week that include the FOMC Minutes and the June Jobs Report. Today’s economic calendar includes Gallup US Consumer Spending Measure, Gallup US ECI, Factory Orders, 3-Month Bill Auction, 6-Month Bill Auction, TD Ameritrade IMX, 4-Week Bill Auction, and William Dudley Speaks.
Brexit Aftermath
Our View: The ESU16 traded up to 2104.50 last night. That is 123.5 handles (points) off last Monday’s 1981.50 low. It’s been another shocking example of how the global central banks work together. Clearly the S&P sold and rallied too fast. If you are confused you have company. As traders we are trained to adjust quickly but that’s not always easy to do. One day sentiment is overly bearish and the markets are pouring lower, then the next day the markets are flying higher. Our view, buy the early weakness and sell the rallies.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 out of 11 open markets closed lower: Shanghai Comp +0.60%, Hang Seng -1.46%, Nikkei -0.67%
- In Europe 9 out of 12 markets are trading lower: CAC -1.28%, DAX -1.40%, FTSE +0.16% at 6:30am ET
- Fair Value: S&P -8.01, NASDAQ -7.77, Dow -99.02
- Total Volume: 1.65m ESU and 6.1k SPU traded
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