It’s time to put the January effect aside for now and say hello to the beginning of the month mutual fund buying, or as we coined yesterday’s rally, “Mutual Fund Tuesday”. After the ESH16 made a low at 2038.25 on the open they started taking out the upside buy stops I pointed out in yesterday’s Opening Print. I mentioned that the buy stops in the S&P futures ran up to the 1974 level and the high of the day came in at 1978.50 on the futures close. During the Globex session the ESH16 followed through on the upside trading all the way up to 1984.50, and at 6:00 am CT is trading 1973.00, 11.50 handles off the Globex high and down 5.00 handles from the close.
Buy S&P / Sell Bonds
In the main part of yesterday’s trade was the ‘mammoth’ asset allocation; buy stocks / sell bonds. The allocation away from bonds to stocks was very clear to see. Every time the bonds (ZBM6:CBT) down ticked the S&P futures (ESH16:CME) would uptick. As we have continued to point out, the mutual funds turned buyers on the close at the end of January with an MOC to buy $4.4bil, and literally every trading day but two since then there has been buying on the close. Bullish or bearish, the continued buying will ultimately play catch up with the stock market, and yesterday things eclipsed on the upside. Was it completely the mutual funds that caused the push higher? No, there was a high level of short covering and buy stops above the markets in all the stock indexes. As the cash buyers rolled in it widened out the premium levels between the S&P futures and the S&P cash setting up index arbitrage buy programs, and with all the buy stops above, it was just one giant buy program. The lack of pull backs in the S&P futures was limited to 2-3 handles. If you played that game and were not fast. or you were looking for a larger pull back, it never came.
Global Surge
After seeing the largest up move since January 29th, the global equity markets extended their gains, and oil fell on a surge in the US stockpile. In Asia the Nikkei rose +4.1%, on tap for its fifth consecutive day of gains, the Hang Seng closed up +3%, and the Shanghai Composite rose +4.3%. By midmorning the European Stoxx was up +0.60% and the FTSE was up +0.4%. Yesterday the Dow Jones and S&P futures saw their largest one day gains since January. The ongoing question remains; is the low in? It was only over the last few weeks that the word recession was being thrown around and now it seems like no one is talking about it. Oil and the metals markets have rebounded, and with the oil market back on a two month high, clearly the move higher in oil prices has lent support to the stock market. Copper and iron ore prices have moved higher on hope that China will continue to stimulate its economy. The ECB and Mario Draghi seem to be on the same page, and the global markets are starting to recover, but that doesn’t seem to be enough for some people. After such a rough start to a new year investors are still concerned about global growth, weakness in China, and the fed’s approach to raising interest rates.
Pain Game
In the end I am like a lot of traders out there. After a huge global route, and pushing stocks into bear market territory so quickly, I want to believe the worst is over, but with so much time left in the year I just don’t believe the S&P will continue to go straight up. Right now the markets are inflicting pain on both sides, and I get the feeling this isn’t over. Can the ES keep going up? Sure, but I still think there is a lot of downside risk.
In Asia, 11 out of 11 markets closed higher (Shanghai Comp +4.26%), and In Europe 8 out of 12 markets are trading higher this morning (DAX +0.33%). Today’s economic calendar starts with the Bank Reserve Settlement, MBA Mortgage Applications, ADP Employment Report, Gallup U.S. Job Creation Index, John Williams Speaks, EIA Petroleum Status Report, and Beige Book.
Beginning of the Month Buy Fest
Our View: All I have to say is…what a rip. From yesterday’s 1921 Globex low to last night’s 1984.50 high the ESH is up 63.50 handles. From yesterday’s 1938.25 pull back low to last night’s globex high the ESH rallied 46.25 handles. While I still think the mutual funds have more cash to buy, I am not sure how much higher the ESH16 can go today. MrTopStep has a trading rule that the ‘S&P tends to go sideway to down after a big up day,’ and despite the global stock market push higher overnight and the size of the 24 hour rally, I think it’s important not to get overly bullish into the rally. If you just pay attention to what I call the big levels, the S&P has now held 1800, 1900, 1950 and is now up against S&P 2000. None of the big figures have been easy and I don’t think 2000 will be either. Our view, sell the early rallies and buy weakness keeping in mind our trading rule and how far the ES has gone in a few days.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 11 out of 11 markets closed higher: Shanghai Comp +4.26%, Hang Seng +3.07%, Nikkei +4.11%
- In Europe 8 out of 12 markets are trading higher: CAC +0.16%, DAX +0.33%, FTSE -0.30% at 6:00am CT
- Fair Value: S&P -1.97, NASDAQ -1.58, Dow -20.92
- Total Volume: 2.0mil ESH and 12.4k SPH
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