All Eyes On Non-Farm Payroll

On Yesterdays cash open, the S&P 500 futures (ESU15:CME) opened 7.5 handles higher. It was trading above the 1950.00 level for the first time since Monday, and buy programs kept a steady bid through the first 90 minutes of trade, taking another 18.5 handles higher to the 1973.50 high early in the day. Once the strong bid ceased, attention turned to the downside, and the 26 handle rally from Wednesday’s close disappeared as steady selling controlled the midday, afternoon, and closed the contract down at 1946.75 in slight negative territory.

Asian markets opened last night, and with the Chinese markets closed until next week for Victory Day, we thought that the overnight session would be a little kinder to the index futures, not so…As Asian screens opened, the S&P dropped 20 handles in less than 30 minutes down to the 1928 handle, over the next hour it made a complete recovery, but from there went back on the offer side and after a failed attempt to rally during the European open, the futures are now at 1927.50 at 6:30 CST, down 18.50 handles, and trading 5.50 handles off the low.

Counter Trend Friday In Play?

What controls this market today is the non-farm-payroll (NFP) release at 7:30 CST. We highlighted yesterday the initial bearishness of the August number, as well as the poor performance of the equity index’s surrounding the number in September historically, as well as being down this year 6 of 8 times on the release date.

However, yesterday we noticed that Goldman Sachs revised their projection to +190K, and even the NY Post published an article suggesting the bearish performance of the release of the August NFP number. When a publication like the NY Post is bearish NFP it makes me afraid to be overly bearish going into the number, and with the futures down so much so early, and such a bearish expectation for the number, I wonder if a bad number is now priced in and the bus is potentially too full with everyone short, possibly we could see a run on the buy stops.

Is The Selling Over?

Yesterday, JP Morgan’s strategist Marko Kolanovic wrote in a note to clients suggesting not to assume that risk has passed and that the selling by quantitative funds that he attributed to last weeks decline was only about half way completed, the remaining about $100 billion in stocks they will dump in the next one to three weeks. Of note is that days before last weeks limit down in the futures he had written to clients highlighting that volatility was about to pour into the markets as positions were about to be unwound.

MrTopStep has been saying that, frankly, this price action is a little scary, and while there could be a temporary bounce that we expect for the 1830.00 lows from last week to ultimately be tested. The post NFP week has been weakest period of the month over the last couple of years which typically coincides with the week before expiration when we look for the “Pit Bull’s Thursday/Friday Low”. Also we have been pointing out that during the run back up, volume was steadily shrinking, and then when volume rises it results in a hard sell. Sometime after Labor Day we expect for volume to be returning to the market, and once volume returns and the markets near the lows, there could be an additional shake out of longs with that higher volume. From a historical viewpoint, the run higher for the holiday is done before the weekend, and post Labor Day there is not a push to the upside.

In his letter to clients last night Jason Goepfert of Sentimentrader pointed out the last 26 similar occurrences in price action what we have seen over the course of this summer till now. On the image featured today on top of the letter, it is noted that there is typically a lower low, or at least a retest of lows to be made. This being the situation of the most recent prior correction in 2011 when the S&P 500 (^GSPC:SNP) made an August low and then made a slightly lower low on the retest in October.

S&P 500 FUTURES TAKE A BEATING BUT KEEP TICKING

The S&P has taken a beating since two weeks ago. You can see that as the volume picked up, so did the level of MOC selling. One of the things we have constantly written about is how the MOC buying switched to selling on the last trading days of the March or the last trading day of the first quarter.

In Asia, 10 out of of 11 markets closed lower (Nikkei. -2.15%), and in Europe 10 out 12 of markets are trading lower (DAX -2.06%). Today’s economic calendar consists of: Richmond Federal Reserve Bank Jeffrey Lacker Speech, Employment Situation, Treasury STRIPS, and earnings from Sears Hometown and Outlet Stores Inc (SHOS).

Our View: One of MrTopStep’s friends from the Merc is Tony Laporta, who has a list of rules, and number one as he explains it is:

“1. DO NOT LOSE YOUR ARSE ON FRIDAYS”

He explains:

“Traditionally Friday is a book squaring day. It is by far the most unpredictable, the most difficult trading day of the week. I don’t know why, but if it can go wrong it will go wrong on a Friday.”

Today, we couldn’t agree more. It’s NFP and pre three day weekend holiday. Market will be thin and we dont want to get caught on the wrong side of them. Therefore we will not be trying to trade against trend during the day, and will take it easy. There is nothing worse than being caught trying to buy dips on a very red Friday.

And always remember to use stops when trading futures and options…

In Asia 10 out of 11 markets closed lower : Shanghai Comp. -0.20%, Hang Seng -0.45%, Nikkei -2.15%
• In Europe 10 out of 12 markets are trading lower (6:30 am CT) : ATX -1.28%, DAX -2.06%, FTSE -1.76% at 6:00 am CT
• Fair Value: S&P -1.79, NASDAQ -1.05, Dow -14.16
• Total Volume: 2.1 mil ESU and 3.6k SPU traded
• Richmond Federal Reserve Bank Jeffrey Lacker Speech, Employment Situation, Treasury STRIPS, and earnings from Sears Hometown and Outlet Stores Inc (SHOS).

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