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Analysts’ earnings estimates for companies in the S&P 500 Index are making history this quarter. They resulted in an increase of 6.7 percentage points in projected earnings growth from the beginning of the quarter through Friday, according to weekly data compiled by Bloomberg. The increase is the largest during any quarter since at least 2004, when the figures begin, and has sent the expected growth rate to 22.5%. The first quarter will be the third in a row in which estimates have risen, rather than falling as they have typically done. The streak is the longest since 2005.
March 2021 Quarter End Rebalance, Buy Dow/ Sell Russell 2000
ESTIMATES FOR TOTAL OF $70-90BN OF GLOBAL EQUITY SELL SUPPLY INTO MARCH QUARTER END FROM SEVERAL MONTHLY & QUARTERLY REBALANCING DYNAMICS BREAKING DOWN THAT $70-90BN ~$50BN OF THAT EQUITY SUPPLY IS EXPECTED TO COME FROM US DEFINED BENEFIT PENSION PLANS.
The March quarter-end rebalance is always volatile. I am not actually sure why it’s like that but it proceeds the March quadruple witching options expiration which is also considered one of the largest of the quarterly expirations of the year. While many think the rebalance is the last trading day of the quarter, the sheer size of the process usually takes 3 or 4 days. In fact, a big portion of the rebalance was done last Thursday and Friday. Yesterday it looked to me like a good part of the rebalance showed up after the early morning rally when the Russell was down sharply and dragged the ES and NQ down with it. Late in the day, the bonds rallied and the NQ finally caught a bid. According to Julian Emanuel, head of equity and derivatives strategy at BTIG, “There has been a big tug of war that’s going on. On the one hand, you know there’s stock to sell because of the rebalance, but on the other hand, the market has been very, very sensitive to yields that are stable to lower, that could be one of the catalysts that break stocks out of the trading range.”
In terms of yesterday’s trade, volume was steady all day but the price action was weak. Despite the late-day rally the markets failed to inspire. The big rotation was selling the Russell futures (RTYM21:CME) which fell 2.8% and buying the Dow futures (YMM21:CME) +0.30%. Clearly, there is selling going on tied to the rebalance but there was also a high level of rotations and bonds sold down.
Our view, these are some wicked markets right now. There is no doubt that yesterday was T+2, the funds markets up stocks early and then sold as the markets pulled back. Our lean, you can sell the early rallies and buy the pullbacks or just be patient and buy the pullbacks.
Danny Riley is a 39-year veteran of the CME trading floor. He ran one of the largest S&P desks on the floor of the CME Group since 1985.
As always, please use protective buy and sell stops when trading futures and options.
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