It’s 3:11 ET Friday afternoon and the S&P 500 Futures are trading 4179.00, up 49 points or + 1.2%. During Thursday’s late afternoon decline our plan was to “buy calls or futures” and we are still riding them for the MrTopStep ‘Late Friday RIP” and that’s exactly what the futures did, they ripped. Late in the day as the MiM went from $600 million to buy to $2 Billion to buy the ES traded all the way up to a new all-time contract high at 4186.75. The ES traded 4179 on the 3:00 cash close and sold off down to 4166.50 and settled at 4167.50, up 37.50 points or +0.91%. The Nasdaq settled at 13915, up 153.5 points or + 1.12% on the day. The S&P is now up 6% on the month and 11.3% on the year and thus far is having its best month since November. The red-hot rally that pushed the S&P to new all-time contract highs has many traders concerned that as some of the big-name companies report this week some investors may take some profits.
Goldman Sachs (GS), who reported last Wednesday, said it expects a second-quarter peak in U.S. growth and that it could be tied to weaker stock returns. Morgan Stanley (MS) warned stocks would soon face headwinds. Deutsche Bank (DB) this month called for a pullback of as much as 10% in the S&P 500 as growth decelerates, and BofA Global Research backed a year-end target for the index about 8% below current levels. There is a very big case for a pull back but the question is not how far the markets will fall, it’s for how long will they fall. I just do not buy into a major sell-off. A 10% drop is nothing in the big picture but it’s a start. According to Sam Stovall, chief investment strategist at CFRA; A comparatively long period without a serious drop in stocks has also made some investors uneasy. The S&P 500 has declined at least 5% every 177 calendar days,the latest market advance has lasted 211 days without such a drop.
Last Two Drops
The S&P’s two significant declines since March 2020 have averaged around 8%, lasting 12 days on the way down and taking 45 days to regain lost ground, according to Stovall. In both cases, the market went on to new highs weeks later, a pattern some have attributed to unprecedented monetary and fiscal stimulus buoying investor confidence. Since the Credit Crisis lows the index has climbed 511%, despite five drops of 10% or more and the 34% fall last March, suggesting investors continue to ‘buy the dip’.
You will get no argument from me that the S&P is overdue for a sell-off but all the liquidity provided by the fed and all the stimulus programs are going to support the market for at least the next year if not longer. A well-known trader once told me ‘ you can trade the futures from the long side but buy some puts’. No one knows for sure what the markets are going to do next but the S&P has outperformed analysts’ projections quite often. A Reuters poll of strategists from May 2020 forecasted the S&P closing out the year with a small decline and it went on to rally 25%. In 2019 the strategist expected the S&P to gain less than 4% and it ended the year up 15%.
Our view, I expect we have a volatile week ahead. TSLA (after the bell), GOOG, and AAPL report this week, President Biden is going to roll out his plan to increase taxes on the wealthiest Americans in a speech to congress, and the Feds are having their two-day meeting. On Friday the VIX traded down to 16.81 but settled at 17.33, down 7.38%. In the options, the put/ call ratio 1-month moving average is the strongest of the year. Other option data also shows demand for upside positioning has fallen sharply since April. Picking tops is one of the hardest trades to make. Most of the data I have mentioned is short-term negative but will the S&P cooperate? That’s the million-dollar question! Our lean, TSLA reporting earnings before the bell will determine the direction of the S&P in the first part of the day. Sell the early rallies and buy the pullbacks 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.
Disclaimer: Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Decisions to purchase or sell as a result of the opinions expressed in the forum will be the full responsibility of the person(s) authorizing such transaction(s). BE ADVISED TO ALWAYS USE PROTECTIVE STOP LOSSES AND ALLOW FOR SLIPPAGE TO MANAGE YOUR TRADE(S) AS AN INVESTOR COULD LOSE ALL OR MORE THAN THEIR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS