The U.S. Federal Reserve completed its eighth and final taper yesterday and the algorithmic trading programs exploited the S&P futures (ESZ14:CME) all day. After opening lower and selling off, the Emini S&P futures got hit by wave after wave of index arbitrage sell programs. The Fed said it would shut down its bond buying program at the end of October and set the stage for eventually raising interest rates. While the Fed maintains that it will keep rates low for a considerable time, the first stage of the process has been completed. Moreover, some analysts parsing the Fed’s statement saw a tone some described as hawkish, while others viewed as consistent with the Fed’s earlier cautious tone. Both stocks and bonds took a hit after the Fed offered a positive overview of the U.S. labor market while reiterating that it plans to keep rates low for an extended period of time.
After the taper hoopla the Dow closed down 31.44 points, or 0.2%, to 16974, just a few points shy of 17000. The S&P cash lost 2.75 points, or 0.1%, and the Nasdaq Composite declined 0.3%. Before and just after the Fed announcement the S&P 500 (^GSPC:SNP) could not hold the rallies, but late in the day the futures started to climb as day traders were caught short and a $1.1 billion buy imbalance appeared on the close. Furthermore, weekly inflows to U.S. funds added $6 billion as of Oct. 22. Yesterday’s slight drop put barely a dent in the 10-day rally and as the markets head towards the first week of November we expect more upside. October has been wild: Tuesday’s rally pushed both the Nasdaq and Dow back into positive territory for October with the S&P down just 0.4% for the month. In the end the S&P did two things. First, it made good of bad news and second, it proved its resilience despite the end of the Fed bond-buying program.
I have always liked to know who I am fighting, but yesterday’s trade was right out of a science fiction movie where the computers are telling the humans what to do. On the floor it was a broker over a bad fill, in the bar it was over a girl, but when trading the ES who are the guys running all the programs? The program traders say that we retail traders can’t live without the volume the machines create. I fully disagree. The machines were not there to support the 2010 Flash Crash — in fact, most algo traders turned off their machines. They didn’t want the risk.
That means the algo traders are willing to pick our pockets all day, but when things hit the fan they disappear. After 37 years on the floor I fully believe that all the algos do is disrupt the futures markets and steal money from everyone, from the major stock funds all the way down to the one-lot Emini trader. It has never been an easy game, but in this world it’s the computers that decide when the S&P goes down and when it goes up.
Conclusion: What you see in the futures markets is not always what you get. Only by being patient and expanding your levels will you really be able to make good money. Some guys can trade in and out all day and others just trade a few times, but every time a trade is made an algo bot is in front of it. You can see it when you buy and sell.
Our view is that the S&P may have to pull back a little today before going back up. I think the ESZ14 is on a clear path to 1985-1990 and a close above that level puts the futures back on a path to 2010. My worry is the S&P is up so much in such a short period of time the big rally may not start till the beginning of November … either way it is coming.
In Asia 8 of 11 markets traded higher and in Europe 10 of 12 markets are trading lower this morning. Today’s economic calendar includes GDP, jobless claims, Janet Yellen speaks, EIA natural gas report, 7-year note auction, Fed balance sheet, money supply and a lot of earnings including from AmerisourceBergen (NYSE: ABC), Johnson Controls (NYSE: JCI), ConocoPhillips (NYSE: COP), Cardinal Health (NYSE: CAH) and Starbucks (NASDAQ: SBUX).
Our view: Asia up, Europe down. If you recall I said a long time ago the spread was buy U.S./ sell Europe, and more and more, that is the case. Europe is trying to pull itself out of a giant economic slump, but it is not happening. Europe takes a tiny step forward and giant steps back and it’s not going to change anytime soon. The ESZ14 is down 12 handles, as I said in the above the rally may not start until November. It’s my guess the ESZ14 will rally at some point today, it just may be later in the morning, so sell the rallies and buy weakness with tight stops.
As always, please use protective buy and sell stops when trading futures and options.
In Asia 8 of 11 markets closed higher: Shanghai Comp +0.76%, Hang Seng -0.49%, Nikkei +0.67%
In Europe 10 of 12 markets are trading lower: DAX -1.61%, FTSE -1.01%, MICEX -0.31%
Fair value: S&P -5.93, Nasdaq -8.50, Dow -74.98
Total volume: 1.9Mil ESZ and 5.8 K SPZ traded
Economic schedule: GDP, jobless claims, Janet Yellen speaks, EIA natural gas report, 7-year note auction, Fed balance sheet, money supply and a lot of earnings including from AmerisourceBergen (NYSE: ABC), Johnson Controls (NYSE: JCI), ConocoPhillips (NYSE: COP), Cardinal Health (NYSE: CAH) and Starbucks (NASDAQ: SBUX).