Poor Bond Auction Sinks Stocks

Bank earnings are on tap.

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Our View

The thing about short-term trading — be it in 20 minutes or 2 days — doesn’t mean that you can’t have a wider view of the stock market.

A well-known hedge fund trader who managed $4 billion and executed his S&P futures business through my desk said, “we pick up nickels in front of steam rollers for a living.” To be honest, that’s a fair assessment.

Of course, I would prefer that I hold longer, but that all comes down to yesterday’s sell-off. It was a scary one as the yield on the 10-year note — which rises when bonds and notes fall — went from up 0.11 percentage points to up 4.71% in the afternoon trading. As the bonds fell, so did the S&P. It went from lightly bid to hugely offered after the bond auction results were released.

Yields were moving higher after the CPI inflation data was released at 8:30, but the selloff in 10-year and 30-year bonds accelerated after the Treasury Department announced the results of the auction. According to Barclays analysts, led by Ajay Rajadhyaksha, “There is no magic level of yields that, when reached, will automatically draw in enough buyers to spark a sustained bond rally, in the short term, we can think of one scenario where bonds rally materially. If risk assets fall sharply in the coming months.”

Personally, I don’t think a short covering rally in the bonds can change the picture much. The government uses the auctions to finance debt, a lack of buyers and a sea of selling isn’t something that can be reversed in a few months. This is something that could go on for years.

Our Lean

There is no reason the ES can’t go up again today, but the odds of it happening without a few flunk-a-dunks is low. Today is the week-two FRyday options expiration, with the monthly opex coming next week.

There seems to be a wall at the 4420 level. Our overall lean is buying the 30 to 50-point pullbacks, but that doesn’t mean I won’t sell a good rip if there is a good setup.

Yesterday’s selloff added a directional price change. While I can’t rule out the PitBull’s Thursday low into today’s options expiration, I also can’t rule out a retest of the 4299 low from Monday — that’s this week’s low.

The banks report today too. I want to get a look at the earnings, but my gut is telling me to watch out for another drop. As for levels, @Handelstats says this about the ES:

​​Upside: Trade above 4378 targets 4382.25, then 4385. Hourly close above there targets 4395, then 4403.38, then 4412.48 and 1 sd at 4414.80. Hourly close above there targets 4427 then 2 sd at 4447.35.

Downside: Trade and hourly close below 4378 targets 4367.50. An hourly close below there targets -1 sd at 4349.70. Hourly close below there targets 4339, then – 2 sd at 4349.70.

MiM and Daily Recap

On Globex, the ES traded up to 4421.50 and down to 4407.75 after the CPI number and opened Thursday’s regular session at 4413.75. After the open, the ES traded 4415.00 and then sold off down to 4393.25, rallied up to the VWAP at 4411.00 at 10:28 and then traded back down to a higher low at 4395.50 at 10:45. After the low, the ES stutter-stepped up to 4417.50 at 11:24, sold back off to 4394.75 at 1:04, up-ticked a few points and then made 6 new lows all the way down to 4374.50.

The ES up-ticked a few points and then tumbled down to 4355.50 at 2:20 after the results of the Treasury auction came in way weaker than expected. After the low, the ES slowly ground its way up to 4382.50 at 3:25, dropped down to 4374.75, and then traded up to 4386.50 at 3:39 as the early imbalance showed $71 million to buy. The ES pulled back to 4379.25 at 3:46 and traded 4381.75 as the 3:50 cash imbalance showed $262 million to sell and traded 4381.00 on the 4:00 cash close. After the close, the ES traded sideways and settled at 4380.75 on the 5:00 futures close, down 29.25 points or 0.66% on the day.

In the end, a very weak Treasury auction sent yields higher and the Dec bond (ZBZ23:CME) tumbled lower. In terms of the ES’s overall tone, it was firm. In terms of the ES’s overall trade, volume was a bit higher: 340k traded on Globex and 1.529 million traded on the day session for a total of 1.869 million contracts traded.

Technical Edge

ES

NQ

Economic Calendar

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!