While the S&P has gone up sharply over the last 8 trading days and some of the fear is removed, many traders are still saying the markets are in trouble and going back down.
Last week was a big week for reporting; from Caterpillar to Microsoft, many of the big names met or beat earnings expectations. In addition to the better earnings, new home sales jumped to a 6-year high on Friday and jobless claims remained at 14-year lows with 31 U.S. states posting their lowest unemployment since the financial crisis. On the list of good and bad, the good side has been winning. The major stock indices “shook off” global deflation fears and the S&P has rallied 6 out of the last 8 sessions.
S&P up 5% since mid-September
I am not a Wall Street analyst or writer, but our desk, the largest S&P futures (ESZ14:CME) clearing desk, does give us a “top step” view of the stock market as a whole. Last week’s earnings and and economic surge helped push the Dow Jones Industrial Average (^DJI:DJI) up +2.6%, its largest gain since last December. The Dow is now up 1.4% on the year and up 157% since making its 2009 low. The tech-heavy Nasdaq Composite (NQZ14:CME) closed out the week up 5.3% for its largest weekly gain since 2011 and is now up 253% since its March 2009 lows. The S&P 500 index capped off its best week since 2013 closing up 4.1%, roughly 3% off its high for the year and up 190% since its bottom in 2009. The fear gauge (VIX) slid 1.4% to 16.30 during Friday’s trade. The fear gauge has dropped 38% since the S&P touched a 6-month low on Oct. 15. In my opinion the selloff came to a halt on Oct 16 when St. Louis Federal Reserve President James Bullard said “policy makers should consider delaying the end of quantitative easing.”
September and October: No surprise
As I have said many times, I am a historical stats trader. I fully believe that there are good and bad seasons for stocks. Was I surprised that the markets sold off during September and October? No, not at all. In fact, the selloff was right on time and I warned people about it. At the end of July into early August I wrote about the possible decline. Not once but many times I said that the S&P would get past the September Quadruple Witching and that there would be selling after the 3rd quarter rebalance and into the “spooky month” of October. I even warned people of October’s “bear killer” tendencies. I had no idea that James Bullard would come out saying the the Fed should consider delaying the end of the quantitative easing, but at the end of the day it doesn’t matter what causes the turning point or gives the market an excuse to turn. In trading, how you get from point A to point B doesn’t matter; it’s just that you got there.
Conclusion: The S&P has rallied a full 153 handles in ten days, and as much as we may like the markets, we think the S&P could be getting close to a short-term high. Between the European bank stress test, which 24 of 123 banks failed, and an overbought S&P, many traders think the S&P could go down into the Fed’s two-day meeting and its final taper this week.
In Asia 5 of 10 markets traded lower and in Europe markets 7 of 12 markets are trading lower this morning. The week’s economic calendar includes 18 economic releases, two-day Fed meeting and final taper, 10 T-bill or T-bond auctions or announcments. Today economic schedule start with the PMI Services Flash, Pending Home Sales, Dallas Fed Mfg Survey and earnings from Allergan (NYSE: AGN), Twitter (NYSE: TWTR), Merck & Co (NYSE: MRK), and Amgen (NASDAQ: AMGN).
Final Taper
Our view: There has been a lot of hype about the Fed’s final taper. Beyond Ebola it is probably the most talked-about market-moving event, but does it deserve the hype? In my opinion it doesn’t. Whenever there is something so talked about it generally doesn’t play out the way the public sees it; while the POMO (Permanent Open Market Operations) did supply endless liquidity, which the market will now have to manage without, I still insist zero borrowing cost will continue to support the stock market.
Our view is that the S&P may be nearing a pullback. Mutual Fund Monday has been down 6 of the last 10 Mondays. It was 6 in a row down until last Monday broke that streak. We have been looking at 1970-1973 in the S&P cash (^GSPC:SNP) as a possible resistance level. Let’s face it, the rally left most people standing at the gate. Is the selloff over? I think it is, but I also think a 30- to 40-handle pullback is in order. Our call is to sell the early rallies using tight stops.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 5 of 10 markets closed higher: Shanghai Comp -0.51%, Hang Seng -0.68%, Nikkei CLOSED
- In Europe 7 of 12 markets are trading lower: DAX -0.37%, FTSE -0.69%, MICEX +1.11%
- Fair value: S&P -6.44, Nasdaq -9.42, Dow -76.49
- Total volume: 1.6Mil ESZ and 2.7K SPZ traded
- Economic schedule: PMI Services Flash, Pending Home Sales, Dallas Fed Mfg Survey and earnings from Allergan (NYSE: AGN), Twitter (NYSE: TWTR), Merck & Co (NYSE: MRK), and Amgen (NASDAQ: AMGN).
[s_static_display]
