ES 03-15 (5 Min)  1_9_2015

The Dow, S&P and Nasdaq all gained 1.8% on Thursday. The Dow (^DJI:DJI), which was down 2.5% in the first week of the year is now up 0.5% in January. As of yesterday’s close all three indices were in positive territory for the year to date.

In the final days of 2014 and into the first trading days of the new year the big investment and mutual funds took some profits. They bought bonds and sold the S&P. While some traders have their reasons for why the S&P rallied so much, we think it’s just part of how the S&P works; it has to go down to go back up.

Perfect storm

Yesterday the Dow Jones futures closed up 313 points or 1.8%. The S&P 500 futures (ESH15:CME), which closed up 25.3 points on Wednesday, added another 35.4 points yesterday or up 1.8%. The Nasdaq futures (NQH15:CME) added another 80.75 points, also up 1.8% on the day. There have been many large ups and downs throughout my career. In the 1987 crash I personally did 9000 contracts in the heat of the battle, but as scary as it was back then I can honestly say that I’ve never seen overall price action in the S&P like we’ve seen over the last several days. It’s one thing to see the brakes put on the decline so quickly, but it’s entirely different when the S&P rallies 74 handles in two days. The algorithmic and HFT trading programs not only dominate the market but also exaggerate big moves.

I believe that to win in these markets, traders need to employ as many trading tools as they can, with a forward-looking view. 2015 will continue to be volatile. Below is the Stock Traders Almanac: First Five Days.

Stock Traders Almanac; First Five Days

Poor Start to 2014, Turn to January Barometer

By Jeffrey A. Hirsch & Christopher Mistal
After eking out a 0.2% gain during the Santa Claus Rally, the S&P 500 failed to post a gain over the past five trading sessions, officially making the First Five Day early warning system negative. S&P’s 0.6% decline is the first loss since 2008 when S&P plunged 5.3% in the first five days. The last 23 down First Five Days were followed by full-year declines 11 times for a 47.8% accuracy ratio and a 0.2% average gain in all 23 years.

 

 

2015-01-09 07 44 41

In Midterm Election Years this indicator has had a spotty record—almost a contrary indicator. In the last 16 Midterm Years only eight full years followed the direction of the First Five Days and only two of the last nine (2006, 2010). The full-month January Barometer (page 16, STA 2014) has a better Midterm record. Excessively bullish sentiment and this poor start to 2014 are worrisome; however given the First Five Days propensity for error, we will reserve judgment until the final arbiter of these year end/New Year indicators, the January Barometer, registers at month-end. The December Low Indicator (2014 STA, page 40) should also be watched with the line in the sand the Dow’s December Closing Low of 15739.43 on 12/12/13.

Short squeeze

Last year, many hedge funds failed to keep up with the S&P and we saw a record number of funds go out of business. The sharp early drop this year pushed many investors away from buying stocks. In the last few days the big investment firms have reversed course and are once again selling bonds and buying stocks. While the moves have been exaggerated, the recent rally was a great example of what we’ve been trying to point out for many years. The natural cash buyers, meaning the mutual funds, are constantly buying. It doesn’t matter if stocks are going up or down. But when markets are reversing back up the buying becomes more dramatic. The shorts sell into the decline until at some point the selling exhausts itself, the sellers start to cover their short positions, and that buying forces stocks back up. Those exiting buyers end up buying the offers, triggering index arbitrage buy programs that push the bid/offer higher, often in a matter of seconds or minutes.

In Asia 8 of 11 markets closed higher and in Europe 7 out of 12 markets are trading lower this morning. Today’s economic calendar includes the employment situation, wholesale trade, Richmond Fed President Jeffrey Lacker speech in Richmond on the economic outlook, and earnings from Acuity Brands, Inc. (NYSE: AYI) and Infosys Ltd. (NYSE: INFY).

Our view

All I have to say is WOW! We have never seen the types of moves we see in the S&P 500 today. The game has become so robotic, so tied to news events, and so tied to overbought and oversold conditions that if you get on the wrong side of it you’re dead meat. Yesterday the S&P made its low on the open and rose 20 handles in the first 90 minutes. If you tried to short it you got smoked. It’s like night and day, one day the computers are pushing the S&P lower and the next day the computers are pushing the S&P higher. How can it be that the S&P sells off for four days in a row, losing over 100 handles, and then rip over 70 handles higher?

There is a lot to think about. Has the ES gone too far, too fast? Is it possible to see some type of countertrend Friday trade? Will the ES pull back and make the PitBull Thursday/Friday low or did we already see it on Tuesday the 6th? Will the negative stats over the next few days prevail? Did crude oil double bottom? I am going to take a back seat today. I did well on my options trade but as PitBull says, you’re only as good as your last trade.

ROCKEM SOCKEM ROBOTS and the S&P 500

January expiration study: https://mrtopstep.com/january-expiration-statistics/

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

  • In Asia 8 of 11 markets closed higher: Shanghai Comp. -0.24%, Hang Seng +0.35%, Nikkei +0.18%
  • In Europe 7 of 12 markets are trading lower: DAX -0.55%, FTSE -0.48%, MICEX -2.68%, GD.AT +2.78% at 5:30 CT
  • Fair value: S&P -6.43 , NASDAQ –6.22 , DOW -73.05
  • Total volume: 1.55mil ESH and 10.4k SPH traded
  • Economic schedule: Employment situation, wholesale trade, Jeffrey Lacker speaks and earnings from Acuity Brands (NYSE: AYI) and Infosys (NYSE: INFY)

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