S&P 500; China Turmoil and Weak Growth Rattles Global Markets

Commentary, News, Our View, S&P 500, The Opening Print, Video

Trend Day 130

After a weak close to 2015, global stock markets sold off sharply on the first trading day of the year when economic data out of China continued to show a shrinking economy on a low manufacturing PMI release. The increased volatility that started at the end of July continued right into the end of the year and into the new year, and it looks like there could be a lot more to come. At home in the U.S., the ISM manufacturing numbers showed factory output shrank to its lowest level since 2009, and that led the dollar and gold rally. On the 3:15 futures close, the S&P futures (ESH16:CME) closed down 26.5 handles, or 1.31%. The Dow Jones futures (YMH16:CME) closed down 256 points to 17085.00, or down 1.49%, and the Nasdaq 100 futures (NQH16:CME) at its low was down 158 points, or 3.6%. It was the worst start to a new year for the Dow Jones in 84 years.

From information provided by Bespoke Investment Group, the exchange traded fund that tracks the S&P 500 index, the SPDR S&P 500 ETF Trust , which closed down -1.40% on the day, has only opened lower on the first trading day of the year 2 times out of the last 22 occasions, or since its inception 22 years ago. Yesterday the SPY opened sharply lower and was down -2.10% at 1:00 CT.

According to Dow Jones data, if the DOW’s morning plunge had held, it would have been the worst start to a new year since 1932. It would also only be the fourth time that the Dow Jones has fallen by at least 2.5% on the first trading day of the year, with 1904, 1922, and the aforementioned 1932 representing the other periods. Does this signal a bad year for stocks? According to Dow Jones data, in the years the Dow has fallen at least 1% to begin the new year, stocks have ended the year with an annual gain of 9.5%. Dow Jones statisticians, however, point out that the last three times the market has slumped at the start of the year—including 2000, 2001, and 2008—stocks seen a negative return of 15.7%.

imbalance_01-05-2016

The index markets rallied, then stalled out late in the day, and eventually started moving back near the early low of the day. It was looking like new lows, and a bearish close, until the MrTopStep Imbalance Meter started to show over $500mil to buy MOC at 1:40 CT. As the S&P futures sank the MiM started to show increased buying on the close. This caught the short sellers selling at low prices late in the day, and in about 45 minutes the ESH15:CME rallied from 1984 to 2009.50, a 25 handle rally when the MiM came out showing over $2.3bil to buy. The actual 2:45 CT imbalance showed $2.5bil to $3bil to buy.

Like it or not, and it’s not everyday, but the MrTopStep MiM proved itself a worthy trading tool on the first trading day of 2016. We all know what we are up against in 2016; a $4.5 trillion dollar balance sheet, and the Fed’s Williams saying to expect at least 5 rate hikes this year, is enough to scare the markets lower. If the past has taught us anything, it’s that the S&P has to go down to go back up, and the first few days of December maybe hard to fight.

From Stock Trader’s Almanac

At the lows of today’s session, DJIA was off to its worst first trading day since 1932 when it shed 4.2%. A late-day rally trimmed losses and DJIA finished the day off 1.6%, S&P 500 down 1.5%, and NASDAQ lost 2.1%. In recent years, the first trading day of the New Year has not been as bullish as it once was. We have said the same thing about full-month January performance. Despite today’s losses, DJIA’s December closing low of 17128.55 on the 18th remains intact.

In the following table, stats for the recent 21-year period on the second trading day of the year have been compiled. When compared to the first trading day, S&P’s second day % Up has been better, 47.6% compared to the second day’s 57.1%. DJIA’s second day matches its first day at 66.7%. NASDAQ is slightly less bullish at 52.4% on second days versus 66.7% on first days. Dates shaded in grey represent losses occurred on the first day of that year.

second trading day of year performance

In Asia, 9 out of 11 markets closed lower (Shanghai Comp -0.26%), and in Europe 11 out of 12 markets are trading lower (DAX -0.69%). Today’s economic calendar includes Motor Vehicle Sales, Gallup US ECI, Redbook, 4-Week Bill Auction, and a 52-Week Bill Auction.

Hello TurnAround Tuesday

Our View: As an ES trader, I have to say that yesterday was a wild one. That said, all the selling and weakness came down to the final hour of trade, and the $2.5bil to $3bil to buy on the 2:45 CT cash imbalance. I know China is important, but I also know the US has pushed back from China’s weakness before, and the S&P will do it again. The S&P is now, and always will be, the world’s leading stock market index, and it proved itself on yesterday’s close. Our view is that the ESH still goes higher. Sell the early rallies, buy weakness, and say hello to TurnAround Tuesday.

‘The S&P 500 and China’s Global Risk’

As always, please use protective buy and sell stops when trading futures and options.   

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    • In Asia 9 out of 11 markets closed lower : Shanghai Comp -0.26%, Hang Seng -0.65%, Nikkei -0.42%
    • In Europe 11 of 12 markets are trading lower : CAC -0.62%, DAX -0.71%, FTSE -0.07% at 5:00am CT
    • Fair Value: S&P -8.39, NASDAQ -8.74, Dow -97.88
    • Total Volume: 2.2mil ESH and 21.9k SPH
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Danny Riley (2873 Posts)

Danny Riley has worked in the futures and options industry for 38 years, including the CBOT’s bond room, where he worked for several of the Market Wizards. He went on to build the largest volume desk in the S&P 500 Index Futures, serving some of the largest banks and hedge funds, the UBS program trading business, and some of the world's top individual traders. As a leader and co-creator of the MrTopStep IM-Pro Trading Room, he shares trading ideas and breaking market news live from the floor with our other professional traders and new traders eager to experience the power of collective intelligence. Join us today and get the edge only social trading can give you.


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