Yesterday’s overall trade and volume were some of the lightest in several weeks. As the summer grinds on the only things that are 100% clear are the global banks continued support, and an S&P 500 futures that is trading at new all time, contract highs. With the S&P up nearly 250% since its credit crisis 666 lows, the S&P is not only going up, it’s busting out.
What Goes Up Must Come Down
I do not think there is anything out there we don’t already know. Brexit, Paris attacks, Turkish coup, and better than expected earnings. Did I miss anything? I don’t think so, but the the disconnect between negative news and new highs seems to be a constant. Not that you can’t sell the news and be right, you just have to exit quickly. It’s all part of the never ending support lent by the central banks.
In the past, the quantitative easing was centered on the U.S., but now it’s gone global. With money pouring back into U.S. mutual funds there maybe more upside to come. With the big shift in sentiment, and the S&P up so much in three weeks, Fridays July option short squeeze out of the way, and many of the big accounts covering into the highs and going long, I think the next 40 handles (points) could come in on the downside. Everyone is just too loaded up and the S&P needs a down week / pull back to see what it is made of.
Contrarian View
When I look back on my trading some of the best trades were catching falling knives when everyone was selling / bearish. Over the last several weeks, if you adopted that idea / strategy, you made fast money. One of MrTopStep’s number one rules is that it takes days and weeks for the S&P to go down and only one to bring it back. That has been a winning trading rule for many years, but recently the declines are one or two day wonders, and the rallies take days and weeks.
Somehow the the computers favor that idea also. The patterns are supported by all the zero borrowing policies and how the programmers set up their algorithmic coding, but the other part is what happens when the crowd gets too short into a decline. I talked to the PitBull about this and he said that my view is correct, and despite what anyone thinks, it’s exactly how things work. Once the computers catch everyone off base they move the S&P the other way.
Lets face it folks, the humans are becoming outnumbered, and outgunned, when it comes to the computerization of algorithmic and HFT trading programs. Like my friend that runs a $3 billion hedge fund says about day traders… it’s all about picking up nickels in front of steam rolls.
Overnight, global equity markets saw some profit taking leading the ESU to a 2151.25 low this morning, down -8.75 handles. A bounce at 6am CST brought the ES back to 2154.50 on volume of about 125K. Yesterday, bulls were unable to really retake the driver seat, and the futures became vulnerable last night. Today’s session is quiet with bulls needing to find an early low to bid up and resume the dip buying trend.
In Asia, 6 out of 11 markets closed lower (Nikkei +1.37%), and In Europe 8 out of 12 markets are trading lower this morning (DAX -1.35%). Today’s economic calendar is very light including Housing Starts, Redbook, 4-Week Bill Auction and a 52-Week Bill Auction.
Our View: If the S&P goes up from here … great… but I am leaning to buying some cheap puts. Like my friend Hayes says, you can trade the long side in the ES, but own some puts. I am going buy part of the position this week and add to it going into the end of July. I have made some decent cash over the last week and a half and I am going to use some of those profits to pay for the trade. We have the housing starts number this morning but other than that it’s all earnings. Our view, sell the rallies with tight buy stops.
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 6 out of 11 markets closed lower: Shanghai Comp -0.23%, Hang Seng -0.60%, Nikkei +1.37%
- In Europe 8 out of 12 markets are trading lower: CAC -1.15%, DAX -1.35%, FTSE -0.38% at 6:30am ET
- Fair Value: S&P -6.26, NASDAQ -6.95, Dow -82.06
- Total Volume: 1.2m ESU and 2.6k SPU traded
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