There is a lot of pessimism out there going into the beginning of 2015. On the final trading day of the year the S&P 500 (^GSPC:SNP) closed sharply lower. While many market pundits will point out that the weakness in stocks was tied to end-of-the-year tax selling, the reality of the decline was a combination of the year-end rebalancing and profit-taking. With the S&P up over 200% since its October 2009 lows, the big investment funds and mutual funds sold stock and bought bonds.
The S&P 500 more than topped Wall Street’s expectations, making 53 new record highs while the Dow Jones Industrial Average (^DJI:DJI) climbed above 18,000 for the first time. At the start of 2014, top Wall Street strategists predicted the S&P 500 (ESH15:CME) would rise 6% over the year, according to research firm Birinyi Associates. It finished trading Tuesday up 12.6% for the year. A combination of positive economic developments, an accommodative central bank, better-than-expected earnings and a big drop in energy prices pushed stocks higher. The S&P 500 rose 11% to 2058.90. Wednesday’s 1% decline left the S&P down 0.4% for the month, ending a six-week winning streak. According to data compiled by Bloomberg, the biggest bull market since the 1990s powered higher as $1.1 trillion was added to American share values and the S&P 500 overcame five separate declines of 4 percent or more. The gauge never once fell more than three straight times going back to 2000.
When looking back at the final trading days of 2014 a few things come to mind. First the VIX moving higher early in the week, which seemed to change the overall tone of the S&P futures. As the week rolled on it was clear to see that the rallies were not holding. Every time the futures would short cover they would reverse back down. While the net changes were positive the S&P was closing well off its highs of the day. One of MrTopStep’s trading rules came into effect. While we do not pretend to be smarter than our readers, we do feel that some of our old trading rules from the trading floor still apply. In Wednesday’s weakness we fell right into one of our rules called the walkaway trade. This occurs when the mutual funds and big investment firms run out of money to buy stocks at the year-end, leaving the stock market susceptible to a decline. While this may have played into it, part of the weakness was also a combination of what we listed above.
Will the S&P continue to lead the markets higher in 2015? Was Wednesday’s selloff an omen of things to come? Will cheap crude oil continue to hold gas prices lower at the pump? Will the Fed continue to be as accommodative in 2015? And was the final trading day of 2014 the beginning of what could be a very volatile trading year? Are treasuries ready for higher rates? And will we see a big jump in volatility? These are all great questions. MrTopStep still contends that stocks will move higher in 2015. We also believe that while stocks may sell off when the Federal Reserve raises interest rates, they will resume an upward trend. We also believe 2015 could be a very volatile year for trading.
Seven of 8 Asian markets open for trading closed hgher and in Europe 6 of 10 markets are trading lower this morning. Today’s economic calendar includes the PMI manufacturing index, ISM mfg index, construction spending, 3- and 6-month T-bill announcement, Fed balance sheet and money supply.
Our view: One has to question if the Street really didn’t know that there was $2.4 to $2.5 billion in stock to be sold on Wednesday’s close. This stuff just doesn’t happen at the last second. Traders that take these types of orders probably knew very early on what was going to happen. The mutual funds sold big on the last day of the year and it’s our guess that some of that money will be put back to work in the first few days of the new year. Will the S&P 500 go back up today? The other question is will the CME and the NYSE even see volume for a full day? When some big sellers filter in, the algorithms will start to read the tape. Then, as selling increases, the algorithmic programs will pick up their pace. As we’ve said many, many times, the S&P never does what everyone wants it to do when everyone wants. Our view is that the S&P starts to go back up but we cannot rule out further weakness throughout the month of January.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 of 8 (open) markets closed higher: Shanghai Comp. CLOSED, Hang Seng +1.07%, Nikkei CLOSED
- In Europe 6 of 10 open markets are trading lower: DAX -0.65%, FTSE -0.34% , MICEX CLOSED
- Fair value: S&P -5.48, NASDAQ -3.18, DOW -65.77
- Total volume: 835k ESH and 7.1k SPH traded
- Economic schedule: PMI manufacturing index, ISM mfg index, construction spending, 3- and 6-month T-bill announcement, Fed balance sheet and money supply.
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