Tuesday’s Session was Cycle Day 2 (CD2): Price continued this cycle’s rally, surpassing all targets, as bulls recovered the FOMC sell-off. Range was 40 handles on 1.028M contracts exchanged.
…Transition from Cycle Day 2 to Cycle Day 3
This leads us into Cycle Day 3 (CD3): We’ll mark this day as a “wild-card” as cycle objectives have been met and exceeded. Average Range for CD3 is 44.75 handles. As such, estimated scenarios to consider for today’s trading:
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Chart of the Day
S&P 500 valuation makes room to handle higher bond yields
Stocks are in a position to withstand higher bond yields, according to Keith Parker, UBS Group AG’s head of U.S. equity strategy. Comparing the S&P 500 Index’s forward price-earnings ratio with the inflation-adjusted or real yield on 10-year Treasury notes since 2017 shows as much, he wrote in a report last week. The forward P/E fell 1.2 points from mid-April through Tuesday to 21.3, according to data compiled by Bloomberg, while the 10-year real yield slid 0.1 point to minus 0.9%. “We see shifts in rates as less of a driver for equities,” Parker wrote, as long as they don’t happen suddenly.
ES Drop-and-Pop; Selling the Rallies
The ES traded down to 4205.75 on Globex Monday night and traded 4213.75 on the 9:30 ET futures open. The ES upticked to 4215.50 at 9:33 and then sold off down to 4211.25. The low of the day came into play at the same spot as the Globex low — at 4205.75. Within seconds, the ES rallied 3 to 4 handles off the low, traded back down to a higher low at 4208.50 at 10:09 and 70 minutes later traded up to 4231.75, 26 points off the low.
For the next two hours and forty five minutes, the ES traded in a 3 to 4-handle range until 2:45 when the ES finally ran the buy stops up to 4234.75, gave us a 2-handle dip — a mini back and fill — and then ripped up to 4245.50 at 3:28 as the MIM increased to $1.3 billion to sell. The ES sold off down to the 4238 area and traded 4237.50 as the 3:50 cash imbalance showed $1.4 billion to sell, traded 4236.00 on the 4:00 cash close, and settled at 4236.25 on the 4:15 futures close, up 22.5 points or up 0.55% on the day.
It was pretty impressive considering the Powell testimony we had in the afternoon and the market hardly even flinched.
In terms of the ES’s overall tone, it was firm on the open with an early pullback and rally after Monday’s strong action during regular trading hours.
In terms of the day’s overall trade, volume was steady but not large at just over 1 million contracts changing hands.
Our view: In all honesty, the thought of ES 4400 or 4600 sounds a bit crazy. Before Tom Lee called for 4,400, I originally called for the S&P to trade to that level this year. Now, maybe it’s 4,600. Just think: If we quickly punched the ES up to 4300, we still have another 300 points to go. Especially since we still have the end of the 2nd quarter rebalances and then earnings next month. I still see some type of let down when the earnings end.
Our lean: The ES is up over 150 points from the 4126.75 low from Monday and is in need of a pull back. Our lean for today is to sell the rallies with tight stops.
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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