Yesterday seemed to present more of the same as the S&P 500 futures looked weak into the cash open, was offered until it made an early low, rallied, and made an intraday double bottom in the afternoon, only to rally more than 15 handles to close the day near the highs at 1991.00. Once again, the bears were unable to make a case for lower prices, and by the end of the day, buyers came in and pushed the equity indexes to new highs on the close. The price action from the last few days is telling us that even after a 180+ handle rally in just 14 sessions, longs still are unafraid ahead of a non-farm payroll number, and refused to remove much risk ahead of the number.
Our call yesterday was to trade the edges of the overnight range, and to consider buying 1977 and selling up around the 1988 area. While the cash session stayed within reach of the globex range yesterday, today figures to be at least moderately more volatile. Interestingly, bears get another chance to whack this market lower as recent performance on NFP releases have not fared well.
Unenjoyment Report
Yesterday, analysts from Goldman Sachs released a note detailing some NFP commentary stating, “We expect a 195k gain in nonfarm payroll employment in February, in line within consensus expectations—and a slight downward revision from our forecast at the start of the week. The unemployment rate is likely to remain unchanged at 4.9%. Average hourly earnings are likely to rise just 0.1% month-over-month, due mostly to calendar effects.” Likewise, Deutsche Bank also confirmed the consensus 195K pick.
Meanwhile, Bank of America/Merrill Lynch is projecting a 175K NFP print. BofA’s thesis is that the winter weather that took effect in late January will have played a more noticeable role in a weaker jobs print than what has seemingly been anticipated. MrTopStep believes that there is a greater likelihood that the number will disappoint rather than exceed expectations.
S&P Non-stop to 2000 & Eventual Recession?
Yesterday, Jan Loeys of JP Morgan was on CNBC stating that, “The eventual recession should bring U.S. stocks down some 30 percent, creating a strong downward risk skew to returns over the next few years.” The model he used has recently increased the probabilities for a US recession this year to 33% from 25% and anticipates a 100% probability over the next three years.
Overlooked in the news this week is the fact that Moody’s has downgraded China’s sovereign rating outlook. While this doesn’t come as a surprise, it does show that the markets are doing a much better job digesting Chinese data and adapting to the new environment. However, much like with the Greek debacle over the years, it seems that these economic troubles from China will tend to become relevant in one moment, only to disappear and to be forgotten until the next shoe drops. To be sure, nothing has changed in the world over the last three weeks to cause the rallies we have seen. The rally of crude oil to $35.00 yesterday came not because of better economic fundamentals, but due to potential OPEC actions. For the time being, the economic fundamentals take a back seat, as nothing at this point is spoiling the worldwide equity party.
“The Market Can Remain Irrational Longer Than You Can Remain Solvent”
In Asia, 10 out of 11 markets closed higher(Shanghai Comp +0.50%), and In Europe 11 out of 12 markets are trading this higher morning (DAX +0.91%). Today’s economic calendar starts with the Employment Situation, International Trade, Baker-Hughes Rig Count, and Rob Kaplan Speaks.
Our View: Unenjoyment Friday can be a rough trading day. Over the last two weeks the S&P is up nearly 9%. The dark skies that have been surrounding the markets have moved (for now), and in less than two weeks the S&P has rallied over 8%. The PitBull started talking 1920, but there is an upside gap to be filled at the 1943 level. This mornings emphasis will be the jobs number, but after that we have the international trade numbers. At 7:00 am CT total volume in the ESH16 is only 150,000 contracts traded. I suspect it will be closer to 400,000 by they time the 8:30 open rolls around. Our view, we have to stick with MrTopStep’s trading rule called ‘Counter Trend Friday.’ If the S&P gaps sharply higher or lower on oversized Globex volumes of 400,000+ contracts traded we want to fade the direction. In other words if the ES gaps sharply higher we intend to sell it.
Lets face it the ESH16 has been given its marching orders and even if we get a counter trend Friday trade that doesn’t mean the rally is over.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 10 out of 11 markets closed higher: Shanghai Comp +0.50%, Hang Seng +1.18%, Nikkei +0.32%
- In Europe 11 out of 12 markets are trading higher: CAC +0.93%, DAX +0.91%, FTSE +0.87% at 6:00am CT
- Fair Value: S&P -1.74, NASDAQ -1.63, Dow -20.1
- Total Volume: 1.5mil ESH and 8.4k SPH
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