ES 03-15 (5 Min)  2_4_2015

European bourses rallied and yields on Eurozone bonds fell after the new Greek government gave up its demand for a write-down on its foreign debt. Crude oil rallied for the fourth straight session The news wires will have one version of why the market rallied and MrTopStep will have another. Ours is that the very same news algorithms that pushed the S&P down last week are now pushing the index back up.

Those algos certainly have a lot of headlines to power them:

  • S&P Cuts Ratings on Several European Banks
  • Oil Surges 6%
  • Greek Minister Optimistic on Debt Deal
  • Russia would lose $160 billion a year from $45 oil – central bank
  • Oil jumps as dollar plunges, up nearly 20% in four days

After making a daily low at 1973.75 on Monday the S&P (^GSPC:SNP) started moving back up after the news hit the wires that the new Greek government had dropped calls for big write-downs on its foreign debt. In the new world order of trading it’s all about rolling with the punches but the problem is, a punch hits hard and then it’s over.

Once everyone had sold into the news, the other side of the trade started to develop, and the very same algos that pushed the markets lower began pushing it back up. It all comes down to extremes: When everyone gets too short the buy stops start to build, and when everyone gets too long the sell stops start to build. The computers not only jump in front of our bids and offers but also run through ladders of protective buy and sell stops, often in a few seconds.

CRUDE OIL RIP

Crude oil (CLH15:NYM) on the New York Mercantile Exchange traded up to $51.55 as several U.S. refineries went on strike to helped push petroleum prices higher. In the last week, 90 rigs have been deactivated. The four-day rally has oil near its highest level in 2015. The four-day rally is the longest since August. Oil futures rose more than $1.50 a barrel on Tuesday. Helping oil move higher were extremely oversold conditions (down 60% from mid-June) due to several US shale rigs shutting down. It was only last week that Goldman analysts were calling for $30 crude oil and it was Goldman that said crude would go to $200 when it was trading around $150. It’s hard to say what crude oil is going to do next, but we are not 100% sure the decline is over.

In Asia 9 of 11 markets closed higher and in Europe this morning 8 of 12 European markets are trading lower. Today’s economic and earnings calendar starts with the MBA Purchase Applications, ADP Employment Report, Gallup U.S Job Creation Index, Treasury Refunding Announcement, 3- and 10-Yr Note Announcement, 30-Yr Bond Announcement, PMI Services Report, Jerome Powell speaks, ISM Non-Mfg Index, EIA Petroleum Status Report, Loretta Mester speaks and earnings from many large firms including General Motors Company (NYSE: GM), Yum! Brands, Inc. (NYSE: YUM), Twenty-First Century Fox, Inc. (NASDAQ: FOXA), Humana Inc. (NYSE: HUM), Prudential Financial, Inc. (NYSE: PRU), and Marathon Petroleum Corporation (NYSE: MPC).

No Stops Go Untouched in the S&P

Our View: There is a simple rule: we are not here to fight City Hall. Whether the S&P is going up or down, we want to go along for the ride. I have never pretended to be smarter than you but I have a good feeling for directional “flips.” Over the last few years of selloffs followed by new highs I have stuck to the theory that zero borrowing cost trumps all. Time and time again the markets do the same thing. I understand not wanting to miss the downside when the ES sells off, but why don’t those same people that sold it start to cover before the stampede?

Tudor: It’s all about the Crash

I remember years ago when I went to hear Paul Jones and Peter Borish from Tudor Investment speak, they started talking about selling the S&Ps. Because we did their business on the floor, we knew how they traded, and it was always selling. Time after time, they would sell and then watch the S&Ps bounce and rally. I could not believe how the S&P would go 40 or 50 handles their way, then explode higher. I asked why they only took part of the position off when it was going their way and their answer was clear… they were always looking for a move even further to the downside— a crash. They were always looking for home runs in the S&P, and in 1987, when they were short the S&P, they got their crash.

Our view: While the S&P has seen a quick upside reversal, I am not sure all the big ups and downs are over. This brings us back to the MrTopStep trading rule that says the S&P tends to go sideways to lower after a big up day. I still think there are more shorts to squeeze and buy stops to run, but there are also big economic numbers and earnings and the ES is going to have to get past that first.

“Oil Firms / Greece Up 10%”

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 9 of 11 markets closed higher: Shanghai Comp. -0.96%, Hang Seng +0.51%, Nikkei +1.98%
  • Earlier in Europe 8 of 12 markets were trading lower: DAX -0.29%, FTSE -0.55%, MICEX +0.26%, Athens GD.AT -1.01%
  • Fair value: S&P -6.49 , Nasdaq -7.85 , Dow -74.62
  • Total volume: 1.7mil ESH and 4.8k SPH traded
  • Economic schedule: MBA Purchase Applications, ADP Employment Report, Gallup U.S Job Creation Index, Treasury Refunding Announcement, 3 and 10-Yr Note Announcement, 30 Yr-Bond Announcement, PMI Services Report, Jerome Powell speaks, ISM Non-Mfg Index, EIA Petroleum Status Report.

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