We thought the ESZ15 was setting up to run the downside sell stops during Monday’s holiday trade, but the S&P stopped short. Low volumes and a big MOC buy imbalance pushed the S&P futures (ESZ15:CME) back up to a new high at 2012.50 on the 3:15 CT close. The ES closed firm but weakness in Asia and Europe helped push the index lower on Globex Sunday night. Since the S&P retested its August low, the ESZ has closed higher 9 out of the last 11 sessions, and has gained 6.52% over that period. Helping push the the S&P higher this month has been the energy sector, which is up nearly 10% this month alone.
FED FUELED RALLY LOSING MOMENTUM
With the S&P being overdue for a pullback and looking for a reason to go down, and after crude oil traded up to 50.00 and then sold off down to 46.50, the S&P went for the ride lower. Up until yesterday, the CBOE’s VIX had fallen for 10 sessions in a row, all the way back to 16, its lowest level in two months. According to Ryan Detrick of See It Market “There have only been two occasions since 1990 that the VIX fell 10 consecutive sessions.” Detrick points out that on each occasion returns were positive a month and three months later, averaging +1.1% a month or +3.1% over the three months. As the markets move into the middle of October, and this week’s options expiration, the focus will quickly move to the 3Q earnings. With the S&P up so much over a short period of time, and the big shift in sentiment, the short term risk feels like it’s to the downside right now. Additionally, several big banks report this week, and with the big move down in the VIX and big up tick in the ESZ15, the earnings could set the stage for additional weakness.
Early in the day the ES initially held the 2002 level, but late in the day the futures got hit by several small sell programs that pushed the futures through the 2000 mark, and in the final minutes down to 1991.25 on the 3:15 futures close.
In the next few weeks it’s going to be all earnings. China may come back on the radar, but once we’re past the earnings, it’s going to be a clear shot to 2085 to 2110. The S&P looks too good to keep going straight up, but we expect further pull backs as we move into the final 2 weeks of October.
In Asia, 10 out of 11 markets closed lower (Shanghai Composite -0.93%), and in Europe 11 out of 12 markets are trading lower this morning (DAX -0.84%). Today’s economic releases start with the MBA Mortgage Applications, PPI-FD, Retail Sales, Business Inventories, and Beige Book.
Our View: The S&P finally started hitting out the downside sell stops. It’s 8:00 pm CT and the ES traded down to 1990.50. I think the S&P can go lower but not without some rips. I told the PitBull the ESZ15 was going to 1985 and we may go even lower. The only thing in the way is some mid-month buying and the October expo stats that show the expiration week as being up. Our view is to buy the early weakness and sell rallies. We think the ES can bounce, but we are not sure it will hold. There is still plenty of room on the downside, but that may not happen in earnest until next week.
The Wednesday before the October experation has been up 17 / down 14 of the last 31 (see the full expiration study here…)
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. -0.93%, Hang Seng -0.71%, Nikkei –1.89%
- In Europe 11 out of 12 markets are trading lower : CAC -0.55%, DAX -0.87%, FTSE -0.71% at 5:00 am CT
- Fair Value: S&P -7.93 , NASDAQ -11.12 , Dow -98.13
- Total Volume: 1.5mil ESZ and 3.1k SPZ
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