Before yesterday the S&P 500 [^GSPC:SNP] was up 2.5% since the Federal Reserve surprised the investment world by announcing that it would “taper” its $85 billion a month in bond purchases by $10 billion roughly every month.
As the S&P heads into the January expiration and the ninth trading day of the year, it feels wobbly. After a firm close last Friday and a 3-tick-higher open yesterday, the ESH14 rallied up to 1838.50 and then sold off nearly 30 handles to a low of 1809.50 before closing at 1815.00.
Several things weighed on the stock market:
An analysis from Goldman Sachs saying that stocks won’t go much higher from here and forecasting a gain of just 3% to our year-end target of 1900.
Google [GOOG] down 0.64% and some early earnings warnings sent the S&P down 1.26%. (Google stock is up nearly 1% in this morning’s premarket, however.)
Over the last few weeks Goldman Sachs has been active in the big S&P contract, selling over 1,200 lots last week in one day, and offering 200 SPH14 (PIT) at 1838.00. After that offer went in, the S&P basically fell into a big index arbitrage sell program with the algorithms chasing sell stops all day.
One of our followers commented that he thought the January expiration is bearish according to Stock Traders’ Almanac. So we asked our good friend Jeffrey Hirsch, who responded: “Yes, lately it is weak…”
However, in the past 15 years (1999-2013), the S&P 500’s performance has taken a turn for the worse with expiration day falling nine times with an average loss of .45% and the full-week declining 11 times with an average loss of 1.27%. Given this year’s lackluster start, the S&P’s recent poor options expiration week track record could easily remain intact.
While we have been bullish all the way up, we are no longer the permabull we were last year. We do not believe the S&P is going to have an easy time like it did in 2013.
As the Fed tapers and the easy money and liquidity are pulled, we have no doubt that the S&P will correct. In fact, we were the ones who said we worry about some type of flash crash. Did the decline start yesterday? We could see a few more down days, but we cannot rule out another pop on the upside.
The Asian markets closed mostly lower and in Europe 11 of 12 markets are trading lower. Today’s economic calendar starts out with NFIB Small Business Optimism Index, ICSC-Goldman store sales, retail sales, import and export prices, Redbook, business inventories, 4-week bill auction, Charles Plosser and Richard Fisher speak. Everyone is talking the S&P down right now and it seems like they could be right.
When we are wrong we admit it, and yesterday we wrong. That said, we have some numbers and some Fed speak to get through this morning.
If the SPH starts breaking the 1802 level we have 1780-1785 as support. It won’t be hard to push the S&P down if they want to but we have a rule that the S&P has to get past: The S&P tends to go sideways to higher after a big down day.
In Asia, 8 of 11 markets closed lower: Shanghai Comp. +0.86%, Hang Seng -0.43%, Nikkei -3.08%
In Europe, 11 of 12 markets are trading lower: DAX -0.55%, FTSE -0.15%
Morning headline: “Global markets hesitate and drop ahead of January expiration”
Total volume: ESH14 1.7mil, SPH14 11.6K
Economic calendar: NFIB Small Business Optimism, ICSC-Goldman store sales, retail sales, import and export prices, Redbook, business inventories, 4-week bill auction, Charles Plosser speaks, Richard Fisher speaks[s_static_display]