Yesterday was more of the same song, the ESM16 appeared weak overnight, and early in the cash session, before selling dried up and was unable to really move the market in any critical direction. Buyers came in, gave the index a floor, and then Ms. Yellen gave the markets a GIFT! Her remarks sent the equity markets soaring higher. We noted buy programs instituted on many of the hour and half hour intervals. We knew something was going on and began to unwind our put positions, and the S&P roared higher making its highest close for the year, pushing the index into positive territory.
Overnight the worldwide equity markets have said “thank you” to Janet Yellen as the Asian and European indexes having rallied sharply. The S&P 500 futures traveled up to a new 2016 high at 2061.50 and is currently trading just ticks away from that. It’s obvious, the world loves a dovish Fed. The S&P 500 experienced historic growth during a time of monetary easing, and as traders were anticipating the first interest rate hike since 2006, the markets corrected last August. After the December hike, the markets continued that correction into February, but as economic conditions have created less stability, the Fed has changed their tune to less hawkish in recent months, and even in the March meeting. Fed speakers still seem to indicate a clear direction of at least two interest rate hikes in 2016 as well as an expectation that global economic concerns and market volatility will subside.
No Fight With City Hall
Reading through several bank notes ahead of Yellen’s speech yesterday, there seemed to be concern that her remarks would be overly hawkish, but instead she sounded dovish, more dovish than ever since she became the Chair of the Federal Reserve. Her statement indicated that the Fed could lower rates back to zero or even induce stimulus into the markets. I have often said over the years that we are not here to fight city hall, and as easy money was made possible, the liquidity in the financial markets were at an all time high leading to a several year boom in the stock markets.
New All Time Highs?
Yesterday’s statement was made while the S&P 500 was facing critical resistance on a daily, weekly and monthly time frame. It was the same 2050 area where so much bearish sentiment began to originate last year, and where Bank Of America/Merrill Lynch’s Hedge Fund Monitor often reported funds to stack to the short side. Last year we noted that 2100 was very pivotal, and for the time being it appears that this number will again be tested, perhaps not this week but sometime next month. Is what Chair Yellen said really enough to boost the equity markets to new all time highs? That question is difficult to affirm, but at the same time, the markets have behaved like an addict when the candy was taken away, and now Yellen has gaven a temporary fix. Is it enough to dismiss future rate hikes this year, or global concerns, or uncertainty surrounding a presidential election later this year? Hardly! However, it is enough for now to send bears into their caves of hiding, to move out of the way and give the bulls the ball and dare them to take this market higher.
In Asia, 10 out of 11 markets closed higher (Shanghai Comp +2.77%), and In Europe, 12 out of 12 markets are trading higher this morning (DAX +1.76%). Today’s economic calendar includes Bank Reserve Settlement, Market Focus, MBA Mortgage Applications, ADP Employment Report, EIA Petroleum Status Report, Charles Evans Speaks, 7-Yr Note Auction and Farm Prices.
Our View: What can we say? It’s hard to fight the trend, but at the same time, I don’t want to drink the Kool-Aid. This market is in ‘buy the pullback’ mode, and we will look for a place lower to buy, but that may not be today. At the same time the temptation is to find a spot to sell, and that likely will not be today. With what happened since Yellen’s speech I think Friday’s NFP becomes more important in terms of price action. As for today, we won’t be jumping in front of any strong buy programs to find a short, but if the volume charts show buying drying up at key levels, then we’ll take a stab at a short with tight stops. This environment can run traders over and I keep telling myself, “the trend is your friend”.
As always, please use protective buy and sell stops when trading futures and options.
The S&P 500 and the Yellen Reality Check
- In Asia 10 out of 11 markets closed higher: Shanghai Comp +2.77%, Hang Seng +2.15%, Nikkei -1.31%
- In Europe 11 out of 12 markets are trading higher: CAC +1.93%, DAX +1.77%, FTSE +1.72% at 5:30am CT
- Fair Value: S&P -8.66, NASDAQ -10.61, Dow -103.33
- Total Volume: 1.5mil ESM and 4.0k SPM traded
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