The S&P 500 futures were down just over 1% from Monday to Thursday. After falling hard on Globex Thursday night and gapping up on Friday’s 9:30 ET futures open, the ES rallied up to 4509.25 after the open (on the December contracts) and that’s when things took a turn for the worse.
The S&P had made 54 record high closes this year, the most since 1995. September is always a difficult month for the stock market, and we’ve had warnings this month from several big bank analysts that include Deutsche Bank, Morgan Stanley, CitiGroup, and Bank of America. They all published cautionary views of the current risk to the stock market. Morgan Stanley wrote that they were downgrading their ratings on US equities to underweight and B of A moved its year-end target to 4250. Citi said they see risk for the stock market, as the current ‘bullish positioning could amplify a market selloff.’ That’s as long positions outnumber short positions by 10 to 1 and half of the longs would be in losing positions.
On top of that, there were also several things overshadowing the U.S stock markets on Friday: The 20-year anniversary of 9-11, the US debt ceiling, the Federal Reserve’s taper talk, the supply chain disruptions, and finally, inflation concerns.
The markets were already weak earlier in the week and all three major indices closed lower on the week. On Friday, the S&P notched its fifth loss in a row, its longest losing streak since February, as it finished down 1.7% on the week.
We won’t be doing a big play-by-play on Friday’s trade. The S&P was weak all day and accelerated lower late with the help of a big 3:50 cash imbalance that showed $4.2 billion to sell, pushing the futures all the way down to 4447.25, down 34 points or 0.76% on the day. In terms of the day’s overall trade, volume was high at 1.855 million contracts traded.
In the end, all the government stimulus and quantitative easing have continued to support the S&P, but the negative seasonalities and all the negative news seemed to overpower the markets.
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Baxter is our new AI trading helper. This data is early, new, and not very well tested but we want to share some of our findings. We are concentrating on the SP500 which should benefit ES futures and SPY traders.
No bones for the Bax for Friday’s call thinking the low would be in the first 30 minutes, that was when the high was, the low was in the last 30 minutes. His high call was for the 10:00-12:00 time slot and that, too, was late as the high was put in almost at the open and never made a serious attempt to go higher. So no bones for Bax.
Running on updated models for today Bax sees the low most likely in the first 30 minutes (43% convinced) or the 10:00 til 12:00 time frame (29%) giving the morning an overall 72% likely hood.
The high time model has not completed testing as of this AM. I will update during the day.
Chart of the Day
S&P 500’s gain after 9/11 is dwarfed by previous 20 years
U.S. stocks were far less lucrative in the 20 years that followed the Sept. 11 terrorist attacks than they were before the tragedy. The S&P 500 Index rose less than half as much in the aftermath of 9/11 as it did in the previous two decades, according to data compiled by Bloomberg. To be sure, there was a much smaller gap in the annual rates of change. The U.S. equity benchmark climbed at a 7.3% pace following 9/11, compared with 11.7% beforehand.
Last week was difficult and the week ahead may not be any easier. On Tuesday, traders will be paying attention to the Labor Department’s consumer-price index and more news from central bankers on their views of when the Fed will start to pull back on its QE programs.
Our Lean: the last time the S&P had a weekly loss of this size was the week of June 18th when the S&P fell 1.9%. However, over the next 3 weeks, it rallied nearly 5%. This week is the quarterly September ‘quad witching’ expiration. Here is the link to the Ned Davis S&P and Nasdaq cash study.
My gut says to expect a bounce, but I don’t think the S&P is going to be in a hurry to get back to 4550.
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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