Rule No. 1 when trading the S&P 500 futures is that there are no rules, only patterns. The algorithmic programs that controlled yesterday’s reactions to news releases jumped in front of every order, on every book between the New York Stock Exchange, the P Coast, the NASDAQ, the CME Group and every other venue that trades futures, options and stocks.

NEVER FIGHT THE FED

Yesterday the Federal Reserve did pretty much like I said it would do over the past several days. With Europe gushing with liquidity and a cloud hanging over the US market about the Fed’s next move, the overall weakness in the S&P 500 futures has been very visible to see. Going into yesterday’s session, the ESM15 had closed down 10 of the last 14 sessions or down 7 out of the last 10. Prior to yesterday every rally was preceded by a larger drop. At the end of yesterday’s Fed headline-packed trading session, the Dow futures (YMM15:CBT) that settled at 17770 on Tuesday’s close, sold off down to 17609 and rallied all the way up to 18017, up 408 points after the Fed released its statement, to settle up 1.3%. The S&P futures (ESM15:CME) also had a wild day. On Tuesday’s close the ESM15 settled at 2066.25, sold off yesterday down to 2052.25 just before the Fed headlines hit the tape and rallied all the way up to 2099.00 (bid), a 46.75-handle rally, settling at at 2092.60, up 26.4 handles or +1.2% in one of the largest buy programs I have seen in many years. The Nasdaq futures closed at 4370.50 on Tuesday afternoon, sold off all the way down to 4337.00 yesterday, rallied all they way up to 4438.00, a 101-tick rally, before settling at 4420.25, up 49.75 points or 0.90%. The Russell 2000 futures climbed to an all-time new record high.

The Fed was more dovish than many traders expected. After the last several months of talk that the Fed could raise rates as early as June, the majority of analysts surveyed seem to be looking at September and December. The key reason is the Fed’s own stated benchmarks: sustained 2% inflation and job creation that is paired with sustained wage growth. With wages stagnant and prices struggling against the effects of a strong dollar and cheap oil, the economy has some adapting to do before it will be ready to absorb and take advantage of higher interest rates.

If the Fed acts too abruptly, they know they could cause a large outflow of cash from emerging markets in particular, which are attracting foreign investors with their growth potential. And while Chair Janet Yellen does not talk too much about the ECB’s stimulus, we can’t pretend that the two central banks, if they’re not cooperating, are at least not trying to have conflicting policies. The big forces are that the US is growing and thinking about raising rates, while economies in Europe and Asia are struggling and trying to keep borrowing costs low. The opposite agendas can work together, but not without some global thinking by everyone.

The Fed pumped $3 trillion of giant interest-free loans into the economy over the last six years. Now it faces the daunting task of calling in that tera-loan at a pace that keeps the economy growing and, with any luck, reduces the dangerous level of wealth inequality that puts us all in jeopardy.

In Asia 9 out of 11 markets closed higher and at 6:00 CT in Europe 11 of 12 markets are trading modestly higher this morning. We have a pretty busy economic calendar today, with the jobless claims, current account, Philadelphia Fed business outlook survey, Daniel Tarullo from the Fed speaks, leading indicators, EIA natural gas report, 2-, 5-, and 7-year note announcements, 10-year TIPS, Fed balance sheet and money supply.

Our view: According to the Wall Street Journal, with Wednesday’s rally, the S&P has posted its most 1% up days in a quarter since the fourth quarter of 2011. It sure doesn’t feel that way. This morning we have a busy economic schedule, but once we get past that we think the S&P could be in for another busy day and then we have the March Quad Witch on Friday. Today expo stats show the Thursday before the March Quad Witch up 23 up / down 7 of the last 30 and expo Friday up 16 / down 14 of the last 30. Its 9:40 CT and the ESM15 is up 3 handles at 2095.50. Can the S&P rally again today? I tend to think so, but we have to go with the MrTopStep trading rule that the S&P futures tend to go sideways to lower after a big up day and we think yesterday’s rally qualifies.

S&P Cash Study for the March Expiration

“The S&P, the Fed and a Big Old Squeeze Job”

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

• In Asia 9 out of 11 markets closed higher: Shanghai Comp +0.14%, Hang Seng +1.45%, Nikkei -0.35%
• In Europe 11 of 12 markets are trading higher: DAX +0.02%, FTSE +0.11%, MICEX +0.13%, Athens GD.AT -1.23%
• Fair value: S&P -8.49 , Nasdaq -8.79, Dow -87.95
• Total volume: 2mil ESM and 16k SPH traded
• Economic schedule: Jobless claims, current account, Philadelphia Fed business outlook survey, Daniel Tarullo from the Fed speaks, leading indicators, EIA natural gas report, 2-, 5-, and 7-year note announcements, 10-year TIPS, Fed balance sheet and money supply.

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