SELL BONDS / SELL S&P

A powerful jobs report reinforced the idea that the Fed could start to raise rates as early as June. The CBOT’s June 30-year bond contract rose over 3 full points while stocks closed sharply lower. As the ECB gets closer and closer to launching its new quantitative easing plan, European stocks have been moving up while US stocks have been going down. Despite a higher than expected non-farm payroll number, the S&P 500 futures instantly traded lower before the 8:30 CT futures open. The S&P 500 futures (ESH15:CME) fell sharply on the open but one of MrTopStep’s trading rules called “Countertrend Friday” came into play before the market headed back down.

Long before the 8:30 open, MrTopStep had already said that if the jobs number came in higher than expected, we wanted to sell the S&P (ESH15:CME). The problem? The number came in higher than expected, but the pop was barely six handles before a drop of nearly 30 points.

The Countertrend Friday rule generally works best on a jobs Friday. The idea behind the trade is that when the S&P sells off sharply and continues right into the 8:30 open, there is a tendency for the S&P to short cover after the futures open. What we believe happened is that smaller customers ended up getting short at low prices and, because they cannot hold the futures over the weekend, they put in buy stops a little above where the market was pre-open.

After the 8:30 open, the algorithms saw and chased those buy stops. As you can see by the chart above, the S&P opened at 8:30 Central time near a low. Initially the S&P’s upticked, downticked, and then took off to the upside, running most retail traders’ buy stops. We’ve watched this trade for the last 25 years. While nothing works all the time, this type of price action has worked most of the time, whether it be from a gap higher or a gap lower. It’s kind of a “bus too full” trade, but on a much smaller basis.

Horse of a Different Color

With the bonds down over three full points, the stronger economic data continues to suggest that the Fed is likely to move ahead with interest-rate increases. However, we disagree that it will start in June. While the 30-year bond had a big down day, the 10-year Treasury note had its biggest one-day selloff since November 2013. The 10-year note yield jumped to 2.39%, the highest close since December 26. According to data compiled by the CME group, the possibility of a rate increase at the September meeting was 64% on Friday compared with 51% on Thursday. Fed Fund futures on Friday showed that investors see a 22% chance of a rate increase in June.

One trader we spoke to on the CME floor said it was a bloodbath in the interest rates. And that the drop came right in the middle of one of the last two rollovers in the bond pit. Additionally, the dollar rose against the yen/euro. The euro currency fell to its lowest level since September 2003, falling 1.7% during late afternoon trade, all the way down to $1.0840.

In the end, traders like action and it doesn’t matter where it comes. After several weeks of low-volume sideways trade the S&P got whacked. Let’s see what happens today.

In Asia 10 out of 11 markets closed down and in Europe 12 of 12 markets are trading lower this morning. This week’s economic schedule is much lighter; only 15 economic releases, 10 T-bill or T-bond and one Fed president speaking. Today there are no scheduled economic reports, but Cleveland Fed President Loretta Mester speaks to the NABE conference in Washington.

ESH down 6 out of the last 8 sessions

Our view: Part of the reason the E-mini S&P could not bounce more than 4 or 5 handles Friday was because there was almost $2 billion in stock for sale on the close. The S&P futures rallied going into the final minutes because futures traders got short in the final 30 minutes, thinking the S&P would tank further, and instead the futures rallied six handles on the close. The big guys sold it first because that’s how the game works.

Our view is that there is probably more downside. If the S&P is going to bottom it will be off of some type of retest. Am I suprised at how weak the S&P got? Not at all. We figured there could be a higher jobs number and a selloff, but we didn’t anticipate the futures selling off 30 + handles. We lean to selling the early rallies and buying weakness. There may be more downside, but at some point this week the spoos start going back up.

“Jobs Friday S&P Flunk-A-Dunk”

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

• In Asia 10 out of 11 markets closed lower: Shanghai Comp +1.89%, Hang Seng -0.17%, Nikkei -0.95%
• In Europe 12 of 12 markets are trading lower: DAX -0.40%, FTSE -1.32%, MICEX -1.82%, Athens GD.AT -3.15% at 4:00 am CT
• Fair value: S&P -1.07, Nasdaq -0.35 , Dow -13.75
• Total volume: 1.89mil ESH and 19k SPH traded
• Economic schedule: No scheduled economic reports; Cleveland Fed President Loretta Mester speaks to the NABE conference in Washington.

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