MrTopStep Opening Print – No Let Up In The Big ‘Pops & Drops’

Index Futures Net Changes and Settlements:

Foreign Markets, Fair Value and Volume:

• In Asia 10 out of 11 markets closed higher: Shanghai Comp +1.00%, Hang Seng +1.29%, Nikkei -0.65%
• In Europe 11 out of 12 markets are trading lower: CAC -0.41%, DAX -0.51%, FTSE +0.18%
• Fair Value: S&P -1.64, NASDAQ +2.20, Dow -31.69
• Total Volume: 2.1mil ESH & 1.9k SPH traded in the pit

Today’s Economic Calendar:

NFIB Small Business Optimism Index 6:00 AM ET, Loretta Mester Speaks 8:00 AM ET, and Redbook 8:55 AM ET.

S&P 500 Futures:Looks Good, Smells Bad, #ES Rallies Up To 2671.50 Late And Gets Slammed, MOC Sell $3.2 Billion

Yesterday started out with Asian stocks trading higher, the DAX up 1.5%, and yields on 10-year Treasurys at 2.879%, their highest since January 2014. After closing at 2619.00 last Friday, the S&P 500 futures (ESH18:CME) traded up to 2655.25 on Globex, with overnight volume of 350,000 contracts traded. The ES sold off down to 2626.75 at 8:15, and then traded 2640.00 on the 8:30 open. The first move after the bell was up to 2645.00, before pulling back a few handles and then trading up to 2651.75.

After the early uptick, the ES downticked to 2643.50, and then sold off down to the 2526.00 level, rallied up to a lower high at 2648.00, and then sold off all the way down to the low of the day at 2619.75 around 9:30 CT. The futures then started to stutter step higher, and by 11:20 traded all the way up to new highs at 2661.00. Things calmed down after that, and the ES ‘slowly’ pulled back to the 2650 area and started ‘back and filling’ between the 2650.50 level and the 2656.00 area, and then in came a big by program that pushed the future up to a new high at 2667.50.

Once the high was in, the ES sold off down to 2656.50, and then rallied right back up to the high at 2667.50. There were a few more small pullbacks before trading up to 2668.00. The next move was a quick drop down to 2656.50.

It was constant buy programs all day, mixed in with some small sell programs.

As the MiM went from over $600 million to sell to over $1.3 billion for sale, the ES popped back up to a new high at 2671.50, up 52.5 handles, and then sold off down to 2655.50, had one last push up to 2663.75, and then in a matter of seconds got ‘slammed’ down to 2645.75 on on the 2:45 cash imbalance when the MOC came out sell $3.2 billion. On the 3:00 cash close, the ES traded back up to 2660.00, and then went on to settle at 2654.75, up 33.25 handles, or up +1.33%, on the 3:15 futures close.

From Paul Tudor Jones ‘These Are Not Our Fathers Markets’

Legendary macro trader Paul Tudor Jones predicted that tax reform would have huge implications on the markets.

Jones, who rarely makes public comments on the markets, sent an investor update on February 2 just ahead of last week’s wild swings in the market with the S&P 500 moving into correction territory.

In the letter, he highlighted how President Trump’s State of the Union address on Jan. 30 touting “the biggest tax reforms in American history” should frighten investors who’ve amassed more than $3 trillion in bonds into mutual funds and exchange-traded funds since 2008.

“This statement probably brought the loudest cheer of the night this week as all the Republicans jumped to their feet and offered a chorus of huzzahs. No doubt the tax cut has had a profound impact on the economy in the short-term and that will continue,” Jones wrote. “But I wonder if they would have remained cheering if President Trump had followed with, ‘By the way, Treasury auctions will increase this year from the current projection of $583 billion to almost $1 trillion. Relative to recent auction sizes, Treasury auctions will be higher by $500 billion next year and by $545 billion in 2020. And, secondly, the Congressional Budget Office’s long-term projection for our debt/GDP will eclipse that of Japan at its peak, possibly making us the most indebted country in the world by 2033.”

In fact, it reminds Jones of what he saw early in his career and the impact of an increase in government borrowing amid tax cuts.

“For those of you not old enough to remember, one of the most popular phrases of the 1970s and 1980s was ‘crowding out.’ Get used to it as it describes the detrimental effects excessive public sector borrowing has on the economy, which will become more popular as time progresses. This is all simply breathtaking. It is incredible that at full employment we have passed a tax cut that will push our deficit to 5% of GDP. Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.”

The dollar has gotten weaker, while Treasury yields have pushed higher. The yield on benchmark 10-year U.S. Treasuries hit a four-year high on Monday of 2.885%. It was most recently hovering around 2.85% on Friday. “If I had a choice between holding a US Treasury bond or a hot burning coal in my hand, I would choose the coal. At least that way I would only lose my hand,” Jones wrote. Note: Treasury prices are falling when yields rise.

Jones also expects stock valuations to fall further.

“People often ask where to buy the stock market. The correct answer is when real 10-year rates get back to the long term average of 3.5% and fiscal deficits are back under 2% of GDP. And that day will come. Throughout history, markets have their own way of imposing fiscal and monetary discipline and this time won’t be different. At such point, the stock market will most likely be trading at or below the post-war average of cyclically-adjusted price-earnings multiple (P/E) of 20, rather than the current 33.6 times.”

CAPE is one of the most widely-reported signs that the market as a whole is expensive. CAPE is calculated by taking the S&P 500 (^GSPC) and dividing it by the average of 10 years worth of earnings. It has a long-term average of just over 16. CAPE is now just above 31.

‘Field of dreams’ for macro traders

Jones, 63, began his career as a commodities trader in the cotton pits in the 1970s before transitioning to macro trading. He shot to notoriety after predicting the market crash of October 19, 1987, known as “Black Monday” when the Dow Jones dropped more than 22%.

“My only regret was that one of the unintended consequences of coming of age in those volatile times was learning to never want to own anything for the long run. Classic investing had a negative sign associated with it,” Jones wrote. “Bear markets were very rewarding since fear is a stronger emotion than hope and something can be torn down in fractions of the time it takes to build — whether that be a house, a reputation, or a bull market. Sometimes I almost wish I was a child of a different era as the ensuing 36-year bull market in equities was not something for which I was prepared or trained.”

Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corporation. REUTERS/Eduardo Munoz (UNITED STATES – Tags: BUSINESS)

Jones described the last three years as the “most difficult time” of his macro trading career. During that time, macro hedge funds struggled to put up returns as the market continued to grind higher. The HFRI Macro Index returned 2.24% in 2017 and 1.03% in 2016, and fell 1.26% in 2015, underperforming the broader market and the broader hedge fund index.

Things are already looking up for the macro funds in 2018 so much so that Jones said it makes him feel like he’s “in [his] 20s again.” He went on to compare the turn in the markets as a “field of dreams for macro.”

“As biblically stated, ‘To [every thing] there is a season and a time to every purpose.’ Right now, it feels like that passage was written for my style of trading as the days of buy and hold may be numbered.”

Macro hedge funds saw their strongest month in January since February 2008, according to Hedge Fund Research. HFRI Macro (Total) Index returned 3.7% in January, leading all the other main hedge fund strategies.

The (MiM) MrTopStep Imbalance Meter

Nice selloff on the close, and a great example of how knowing about the MiM can be a lifesaver. We are in a bullish-trend resumption hunting mode, and looking for a gap open of 10+points and then a trend up-day that ends in a 9:1 a/d line day. The gap happened, but the market really was not showing the bullish vigor that it needs to shake off the bearish mood for higher skies.

The MiM started a bit light on the sell side with some indications that maybe that sell would swap into a buy side. A swap like that could gain some more momentum with buyers and see the market run at the end of the day.

At 2:40PM the MiM started to move back toward neutral from sell, a trend that often leads to a MiM flip, but by 3:20PM signs of a sell side MiM were building and build it did, right up to the reveal at 3:45pm ET where we had a 3B sell, and the dollar percentage and symbol percentage were solidly in the sell side.

Like a switch, when the imbalance was announced, the SP500 started to sell off and if you took that 3:20ish sell build, double-digit-easy-trades were available as the market shed almost 25 points in 40 minutes. It wasn’t a strong bullish day yesterday and size and the surprise of the sell turned the market sour.

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Keystone Charts

ESH8: is lower today as the strength in yen is weighing on equities. A break of 2617 would likely see renewed downside momentum.

YMH is lower by -142 pts and will likely remain negative short term with settles below its 50dma (25111 in DJIA).

David Wienke
708-870-5058
www.keystonecharts.net

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While You Were Sleeping

Overnight, equity markets in Asia traded mostly higher, with the NIKKEI as the lone wolf trading -0.65% lower. Meanwhile, in Europe, stocks are trading mostly lower this morning, with the FTSE being the only index higher by +0.18%.

In the U.S., the S&P 500 futures opened last nights Globex session at 2653.25, and was held to just a 23 handle range, which is weird to say, considering how small the overnight ranges were just a few short weeks ago. As of 7:00 am CT, the last print in the ES is 2646.50, down -8.75 handles, with 190k contracts traded.

Please Be Careful Stepping Off The Train

Our View: All I have to say is WOW!!! The PitBull’s Thursday / Friday low came into play during last Friday’s 2530 retest, and has rallied 141.50 handles in less than one full session. Clearly, volatility is back, but will it stay this way? We think it will level off, and we also think the damage to the VIX could continue to keep the ranges in the S&P big, it could the new normal for a while.

According to the CFTC the sudden shift from selling VIX futures to buying them in weekly data released late Friday showed that speculative investors, or those who are classed as ‘non-commercial’ by the CFTC, swung from a net 60 thousand contracts that wagered against the VIX the week before the market turned, to an 86 thousand-contract bet in its favor by last Friday. That’s both the largest ever shift in these positions by speculative investors, and their biggest bet in favor of the VIX since records start in 2006.

To me this means that will have to be worked off before the markets really level off and start going back up. Personally, I think there is a good chance the ES does have another big rally, but I also think there could be some big drops. As I said last week the midterm election could be another turning point, but that months away.

Our view is that we lean to seeing some type of pullback. 2420-2430 is the first area, then the 2590-2600 area. The 141.50 handle rally from Friday to Monday, yesterday’s $3.2billion for sale on the close, and the quick drop off the highs late in the day was pretty negative price action. Our lean is to sell the early rallies and buy weakness, provided the ES doesnt gap down big on the 8:30 open.

Download all of the February expiration stats here.

As always, please use protective buy and sell stops when trading futures and options.

_{Disclaimer: Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Any decision to purchase or sell as a result of the opinions expressed in the forum will be the full responsibility of the person(s) authorizing such transaction(s). BE ADVISED TO ALWAYS USE PROTECTIVE STOP LOSSES AND ALLOW FOR SLIPPAGE TO MANAGE YOUR TRADE(S) AS AN INVESTOR COULD LOSE ALL OR MORE THAN THEIR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.}

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