Things go up, and things go down in the S&P 500 futures, and right now they are going down. Sometimes it’s calm, and sometimes it’s not, right now it’s not. During Friday’s trade the S&P futures again traded below its 200-day moving average at 2059.00, and closed above it when the futures rallied into the close. Six and a half years into the S&P bull market run, investors are trying to figure out if they can still put money to work in the stock market, or should they get out and take some profits.
SIDEWAYS CHOP
Whether the range is 2070 to 2120, or 2050 to 2130, that’s where the S&P is stuck. Are the S&P futures in a 50 to 60 handle trading range, or a 50 to 80 handle range? It really doesn’t matter. In the past, these ranges generally set up new highs, but unlike many of the past pullbacks there was not the constant commodity liquidation like we are seeing over the last several weeks. While traders are fixated on the 200-day moving average, it’s the weakened internals that are a continuing concern (CLU15 traded down to $43,35 in Globex). Unlike in the past, just over half of the stocks in the S&P are in an uptrend, which is the lowest level since last fall. Additionally, the ongoing market on close (MOC) selling on the NYSE seems to be playing catchup to the overall markets. Half of the stocks in the S&P have already seen 10% corrections from their respective highs.
BEAR MARKET OR FALSE START
I am torn. One side of me continues to think that this is just another selloff before going back up and making new highs. That like many selloffs, it is designed to get the public “scared” into selling the S&P. I understand the seasonals and I am paying close attention to the Pit Bull’s last week of July to the third week of August as a reversal period, and I understand that the current weakness could extend into the middle of October, but I have to admit that I am not convinced that this is anything other than a giant rotation where investors get out of riskier stocks. Back over a year ago, I questioned whether money was moving out of US stocks, and moving to Europe as investors search for less risky places to place their money. According to Morningstar, the “Great Rotation” that started last year has seen over $65 billion moving out of US funds, and $158 billion pour into international stock funds. With the S&P down 1% on the year, investors are flocking to Europe (DAX +17%) and Asia (Nikkei +19%). Part of the reason for exiting the US stock markets is because the Fed is becoming less accommodative, and investors are moving to more accommodative markets as the Fed prepares to raise interest rates.
In the end the the US economy is growing, but at a much smaller pace, and will continue to grow after the rate hikes, but the big corporate profits and big gains in stocks is going to continue to slow down. But—and in trading there is always a “but”, according to Bloomberg: Volatility bets signal investor caution:
- Call options in the CBOE Volatility Index (VIX) are the most expensive since 2006 relative to puts.
- Investors currently own 5.9M VIX calls and 2M puts. Last week, options betting on a 10% rise in the VIX cost 19.1 points more than puts with strike prices 10% below the VIX’s level, the widest spread since July 2006.
- The last time calls cost this much relative to puts, bearish investors were hit by an 11% S&P 500 rally in the last five months of 2006
In the end, we know higher rates are coming, and we know the US is $18 Trillion in debt, but in a world of zero borrowing cost there still is no place to go as an investor but stocks. I am sticking to my end of the year call for S&P 2200.00, you can take it from there.
In Asia, 6 out of 10 markets quoted closed modestly lower (Shanghai Comp. +4.92%), and in Europe 7 out of 12 markets are trading higher this morning. This week there are a total of 10 economic releases, 11 T-bill or T-bond Auctions or Announcements, and 2 Federal Reserve bank presidents speaking. There are no scheduled economic reports this morning but Atlanta Federal Reserve Bank President Dennis Lockhart speaks in Atlanta, and earnings from CNP, DF, HTZ, AES, KHC, TTWO, SYY, SHAK, HE, TESY ESE, LYV, ENDP, MDR, SF, IFF, RAX, MR, FRSH, FSC, NGL, DXPE, APEI, DSCO, IPXL, XONE, and PDCE.
Our View: I think it’s fair to say that the S&P is under pressure, but is the S&P going to correct? Or is this just another downside blow off that ends up ripping higher? The Dow Jones has been down 7 days in a row and the Shanghai Comp. closed up +4.92%. Its my guess its time to run some upside buy stops and squeeze out some shorts.
As always, please use protective buy and sell stops when trading futures and options.
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In Asia 6 out of 10 markets closed lower : Shanghai Comp. +4.92%, Hang Seng -0.13%, Nikkei +0.41%
- In Europe 7 out of 12 markets are trading higher : CAC +0.39%, DAX +0.32%, FTSE -0.74%, MICEX -0.11%, at 5:30 am CT
- Fair Value: S&P -5.29, NASDAQ -5.26 , Dow -59.51
- Total Volume: 1.6mil ESU and 5.4k SPU traded
- Economic calendar: There are no scheduled economic reports this morning, Dennis Lockhart speaks
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