After closing Friday with the largest weekly loss since the first week of February, the S&P 500 futures attempted to climb early in Monday’s session, making an early high of 2056.50, up 14.75, before maintaining the offer side for much of the day. The index found a morning low of 2041.75, which was Friday’s settle, bouncing from there to make a lower afternoon low. Then, late in the day in the final hour, the futures tanked into the close, dropping to 2032.25 in globex after the cash close, down 7.50 handles on the day, and 24.25 handles from the day’s high.
The daily pattern appears to be rolling over as the markets have been noticeably less firm with price between the 2050-2100 area. The high for this year came on the first day of this month, and less conviction has been showing up in the equity markets since then. With the markets having firmed up so much since February’s low, it made sense for some profit-taking before earnings, but how much further selling could occur?
After the close, Alcoa (AA) kicked off the earnings season, as shares dipped 4.31% in after-hours, following a mixed earnings release. According to CNBC, “Earnings fell from 28 cents per share in the prior-year period, while sales slid from $5.82 billion.”
The lower than expected earnings have been attributed to lower energy prices, with low oil prices continuing to lean their weight on the economy. Last week, Moody’s downgraded three heavyweights, including Chevron Corp and Shell, stating that “prices are expected to stay low through this year and next and continue to pressure operating cash flows and credit metrics.”
With Alcoa marking the start of the Q1 earning season yesterday, Wall Street anticipates further releases this week from JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Citigroup (C) and more… Expectations for the quarter have been steadily decreasing and are now hitting noticeable pessimism. S&P Capital IQ notes that earnings are seeing “a decline of 7.5% on a year-over-year basis, versus the 4.2% decrease in Q4 2015, and representing the first time since 2009 that the S&P 500 recorded y/y EPS declines in three successive quarters.”
One analyst speculated that with expectations set so low, there is an opportunity for earnings to beat expectations, leading to further equity strength, which is possible – but who is left to buy? We have noted that according to the Bank of America/Merrill Lynch Hedge Fund Monitor last year, there was strong institutional pessimism above 2050; and it showed. Funds used the 2100 level throughout the year as a line in the sand; and equities markets grew weak at that area. With the economic circumstances less optimistic this year, why would sentiment be any different?
One area in which bullish sentiment presides now is with the Birinyi Associates blogger poll, which has begun demonstrating a majority bullish outlook in April for the first time this year. As the market has climbed higher, many indicators pointed to overbought conditions; but what was absent was sentiment turning bullish. It appears that perhaps many shorts are throwing in the towel; typically, the “dumb money” becomes the last to enter the buy cycle before the weight of price action changes the short term trend. This is also noted on the S&P 500 derivative ETF SPY as the open short interest has now dropped to a 12-month low. With the S&P 500 price around 15% higher than the Feb lows, roughly 5% from new all-times highs, and such a bearish-seeming earnings season, we cannot recommend buying. It’s clear that a severely disappointing earnings season is not what is priced in yet with the S&P futures just 2% from the April highs.
Furthermore, last week the Atlanta Fed updated their projections for Q1 GDP, lowering them to an alarming 0.1%. At the same time, other economic indicators suggest further slowdown, including
Leading Economic Index as well as Weekly Jobless claims – which, according to historical trends, could see some rise. Meanwhile, a note yesterday from Brown Brother Harriman & Co suggests that too much attention is being given to the lower GDP projections, since Q1 generally tends to be weak: “between 2010 through 2015, the US economy averaged 0.75% growth at an annualized rate in the first quarter. Growth in the remainder of the year averaged around 2.5%.”
Last year in the Spring, before the May top, we noted the outflows that we saw in the markets, the first since the breakout to new all-time highs in 2013. We also noted that with the potential economic instability, as well as uncertainty surrounding the Fed’s interest rate decision, the status of the markets was uncertain, which is the most damaging atmosphere for equity markets. And while we were not saying at that time that the bull market was over, we indicated that it was time to wake up and pay attention, and that the financial markets couldn’t continue the party much longer. However, as the year progressed, the indexes saw their first 10% correction since 2011, and then saw those August lows break early this year.
We come back to this year with further economic instability and just as much uncertainty surrounding potential Fed actions; and with the United States entering a Presidential political season, it just adds more fuels to the uncertain fire. I have often wondered if the energy companies this year could be what banks were in 2008 and become insolvent. If the economy goes into recession and oil continues to drop, making a new low, it does appear that at least some will consider bankruptcy court.
MrTopStep is not in the business of fear-mongering nor making bold geo-political and economic calls. We are traders. We trade what we see; and while this is not the time for alarm, it is still a time for concern and caution. With the Volatility Index (VIX) so low and the equity indices so high, and the looming “sell in May” weaker seasonals approaching, we believe that put options are cheap right now, and find the conditions favorable for some hedging through the end of the year.
While the day session has been providing a lot of movement, the globex sessions have been seeing some big moves also. Overnight, the (ESM16:CME) traded down to 2029.50 and started moving higher as crude oil futures (CLK16:NYM ) sold off down to 40.02 then rallied up to 40.91 taking the (ESM16:CME) up to 2043.00 and is currently trading 2040.50 at 7:50 am CT.
Our View: From the short term perspective the ESM16 is making a series of lower highs; last Monday’s 2071.50, Thursday’s 2059.75 and yesterday’s 2056.50. However the lows from last Thursday’s 2026.25 is still holding for now. The April option expiration stats are historically bullish, and given the recent bullish trend, makes it hard to fight. But, it’s clear the buying is growing somewhat exhausted above the 2050 level. With the weekly pivot and weekly/monthly VWAPs aligning just under the 2050 price, we see this as the next area for a logical lower high that would lead to a test of the 2020 area. Otherwise, if the futures pop above 2050 and hold, then we have to look for 2070 on expiration strength. Our call for today is to go with what works as we look to sell the 2050 area on the first test today, but feel less convicted about selling it twice.
In Asia, 8 out of 11 markets closed higher (Shanghai Comp -0.34%), and In Europe, 8 out of 12 markets are trading lower this morning higher (DAX +0.16%). Today’s economic calendar includes NFIB Small Business Optimism Index, Import and Export Prices, Redbook, Patrick Harper Speaks, 4-Week Bill Auction, 3-Yr Note Auction, Treasury Budget, John Williams Speaks, and Jeffrey Lacker Speaks.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 8 out of 11 markets closed higher: Shanghai Comp -0.34%, Hang Seng +0.31%, Nikkei +1.13%
- In Europe 8 out of 12 markets are trading lower: CAC -0.09%, DAX +0.16%, FTSE -0.03% at 6:15am CT
- Fair Value: S&P -6.87, NASDAQ -8.07, Dow -89.21
- Total Volume: 1.67mil ESM and 3.3k SPM traded
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