After the worst start to a year in history for the Dow Jones and the S&P 500, the index markets came racing back last week as concerns about the global economic crisis had pushed the markets down too fast and too far leaving sentiment overweight overly bearish. The Dow Jones (YMH16:CBT) and S&P futures (ESH16:CME) closed out the week with their largest percentage gains in three months, and in doing so, broke a two week losing streak that had investors worried about a steeper decline.
In the last week of January, the S&P 500 futures rose +1.7%, and then fell almost 4% over the next two weeks. MrTopStep started pointing out that the shortened holiday week, combined with the February options expiration, could cause some type of ‘thin to win’ type trade, and this was evident having clearly helped the markets rally. Friday’s stock volume was the second lowest of the year. Oversold conditions, firmer energy prices combined with no major downside surprises in China helped push the ESH16 up to new two week highs at 1933.50. The rally, which included a 3 day 131 point (handles) gain in 5 trading days, seemed to catch most of the customer base that had been scrambling the prior week to cover margin calls and roll their options positions lower, to last week beng forced to get out or roll positions higher. While there were no major positives the fear that has been surrounding the market place seemed to dissipate. As of Fridays close the major indexes are down -6% on the year.
Over the weekend, the New York Post titled a story “No Stock Answer: Recent rise not a recovery”. I think this this sums it up, and it fits exactly with what I have been saying, it’s just too early in the year to expected an extended rally. It’s not just all the normal suspects like higher rates and China casting a dark shadow over the markets. Earnings growth is at a six year low, banks are not going up with the rest of the markets and Greek solvency problems will soon be hitting the tape again. It seems like if it’s not one thing its another, and with the the Fed moving rates higher, the easy money trade has disappeared. One major income component that the banks are missing is trading revenue. There is no way to replace it, and with computers taking over most jobs a human would do, it could be a very long process toward a long term recovery.
In the end its 6:30 am CT and the ESH16 has traded up to 1938.75 and is trading at the 1935 level. There is no doubt the S&P looks like it wants to go higher, and probably can, but we do not think the rally will last. I’m not saying the S&P can’t trade up to 1940-1960, but we wouldn’t be buying it if it did, we would be selling it.
In Asia 9 out of 11 markets closed higher (Nikkei +0.90%), and In Europe 12 out of 12 markets are trading higher this morning (DAX +1.67%). This week’s economic calendar includes 24 economic reports, 4 Treasury Bill announcements, 7 Treasury auctions, and 8 Fed speakers. Today’s economic calendar includes Chicago Fed National Activity Index, PMI Manufacturing Index Flash, 4-Week Bill Announcement, 3-Month Bill Auction, and a 6-Month Bill Auction.
Our View: We have a very busy week ahead and it starts out with a big jump in the number of economic reports, Fed speak, and the end of earnings season. While the S&P may have seen its largest weekly gain since the end of November it isn’t out of the woods yet. Crude oil, interest rates and the global slowdown will remain a challenge for the S&P. Our view, sell the early rallies (if the ES is higher) and buy weakness. Don’t forget the PitBulls rule about the S&P rallying early in the day and early in the week during a bear market.
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 +2.35%, Hang Seng +0.93%, Nikkei +0.90%
- In Europe 12 of 12 markets are trading higher: CAC +1.63%, DAX +1.67%, FTSE +1.30% at 6:00am CT
- Fair Value: S&P -3.25, NASDAQ -1.85, Dow -31.47
- Total Volume: 1.6mil ESH and 4.7k SPH
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