SpyGate is now available free to members of IMPRO and MIM trading room. Join the MiM.
Chart of the Day
Small-Cap ‘Index Effect’ Lifts Domtar, Other S&P Entrants
Domtar Inc. is the latest example of how the “index effect” is alive and well for smaller U.S. companies. The paper producer gained 4.9% Friday after being named to the S&P SmallCap 600 Index, which it will join before Tuesday’s open. Domtar will be the 13th all-new entrant this year, according to data compiled by Bloomberg. The other 12 all rose on the first day of trading after their selection on anticipation that funds tracking the SmallCap 600 would buy shares. The group had an average first-day advance of about 11%, and Domtar’s was the smallest.
Stock Market Fatigue
Everything gets tired eventually. The S&P was up over 5.5% at its April highs, but the index has battle fatigue.
Over the weekend, people worried that the big drop in Bitcoin would affect the S&P futures (ESM21:CME) adversely — but it didn’t. The reason the ES dropped was becauseTSLA and Peloton were weak, bonds were weak, and professional traders are selling into the earnings reports even though the S&P is trading at new all-time highs. From my perspective, the S&P is well overdue for a pullback as stocks have acted fatigued this week.
Traders have been comparing the S&P rally to the weeks leading up to the 1987 Crash and the 2000 Tech Bubble, but this rally is so much larger they pale in comparison. Additionally, the historical amount of liquidity being supplied by the Federal Reserve and the government stimulus programs have the markets melting higher.
That said, investors are nervous..
When I spoke to PitBull today, he reiterated what he said last week: “Record highs on negative breadth and low volume is dangerous.”
He also said everyone is long on all the hot names. The big concern on investors’ minds going into earrings season is whether stocks’ high valuations are justified. As of last Friday’s close, 81% of S&P 500 companies that have reported first-quarter earnings have exceeded analysts expectations, while 84% have beat expectations for sales, according to FactSet.
There is a tendency for analysts to talk about slower growth, but as more people get back to work and the economy opens up, I think earnings growth will continue. A lot of optimism has come from the latest economic data, with retail sales for March being the strongest in 10 months.
Can the markets keep going up? I believe so, but I also understand how far they have gone in the first 12 trading sessions of April.
Our View: I am maintaining a bullish bias but that doesn’t mean “you” can’t sell the early rallies and buy the pullbacks. I just prefer the latter.
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