The S&P 500 futures started the day out on a downer. Following a day where the futures rallied from 1920 up to 1933, and capping off the session with large $4 billion market-on-close imbalance on Fridays 2:45 CT cash close, the futures failed to gain traction on the CME’s Globex session Sunday night and into Mondays morning day session. The ESH16 opened at 1919.25, down 12 handles, and then quickly sold off down to 1912.50 during early trade. That was it for bears though. After the early dip came the 27 handle rip, with the ES making a high of 1940 at 2:35pm CT.
End of the Month and Beginning of the Month Buying
There are times when the big money managers sell stock, and there are times when they buy stock. Clearly these big firms sold in the first 3 1/2 weeks of January, and it’s even more clear to see that they started buying some of that stock back going into final trading day of last month and into the first trading day of the new month. However, the equity purchases on Friday exceeded those of yesterday when the S&P rallied sharply late in the day. The difference between Friday and Monday’s price action was evident; Friday was an all day rally topped off with a $4 billion dollar buy on the close, and Monday there was a net buy of $548 million to buy on the close. In both cases the S&P 500 futures rallied, but after yesterday’s rally the ES sold off going into the futures close. The day settled at 1930.50, 9.5 handles off the highs, and continued into the globex open as the futures dipped down to 1923, 17 points from Monday’s high.
What we don’t know for certain is if the month end buying was “new” money or just short covering. As institutions shorted the early part of the new year so heavily it would be logical to assume that the month end rebalancing suggested that they closed some short positions. If a short covering rally can cause a pop in the equity indexes without the conviction of new money, then each rally is suspect. I asked some New York desk managers a few questions concerning their prospective and “feel”, whether this was new money or short covering, and their response was “both”, and we agree.
Every dip has been bought since the March 2009 low. While we will be the first to remind our readers that nothing lasts forever, we also believe that fighting the trend is difficult. True, the trend is starting to bend, but in no way has it broken. Going into the early part of the year with the S&P 500 down as much as 10.75%, many saw this as a gift considering the index has already made a year’s worth of losses, and the risk to reward seemed to direct higher. Whether the strong stocks they bought bounce back this quarter, or later this year, there was no doubt that it was enough of a dip to be bought.
For these money managers who bought off the lows to be proven wrong by years end, it would suggest that the S&P 500 would need to close the year at least 11% higher, or greater, something that the market has not come close to doing since 2008, and before then the post 9-11 decline. The global economic, political and monetary situations remain unclear, but as long as the indexes hold the January lows, it would suggest that the market is low enough to buy. That doesn’t mean that the markets will scream to new all time highs, but at the same time, it would require an additional catalyst to see the S&P 500 down 20% this year.
In Asia, 9 out of 11 markets closed lower (Shanghai Composite +2.26%), and in Europe 12 out of 12 markets are trading lower (DAX -0.95%). Today’s economic calendar includes Motor Vehicle Sales, Gallup US ECI, Redbook, 4-Week Bill Auction, 52-Week Bill Auction, Esther George Speaks, and earnings from Archer Daniels Midland Co (ADM), Chipotle Mexican Grill Inc (CMG), Dow Chemical Co (DOW), Emerson Electric Co (EMR), Exxon Mobil Corp (XOM), Gilead Sciences Inc (GILD), and Pfizer Inc (PFE).
Crude Oil -3%
Our View: Yesterday, CL rallied all the way up the 35.00 level, then fell -4.9%, and is curently down another -3% this morning. Despite the declines, U.S. crude is still nearly 19% above the 12-year low of $26.19, which hit in the middle of January. While Russia has been pushing OPEC to lower output the weakness in China continues to weigh on the energy markets. There are still too many moving parts right now to go all in on either direction. It is a traders market that goes back to one of MrTopStep’s main rules; get in, get out, don’t fall in love with your positions. Our view is to buy the early weakness and sell rallies.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 out of 11 markets closed lower : Shanghai Comp +2.26%, Hang Seng -0.76%, Nikkei -0.64%
- In Europe 12 of 12 markets are trading lower: CAC -1.61%, DAX -0.95%, FTSE -1.61% at 6:30am CT
- Fair Value: S&P -7.09, NASDAQ -9.11, Dow -87.39
- Total Volume: 1.74mil ESH and 9.3k SPH
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