The S&P 500 futures finally pulled back a little, but is still only 1% off its most recent high. From the August 24th low at 1831, to its 2110.25 high, the S&P futures have rallied 279.25 points (handles), that’s over +15% since making its low. A knockout October jobs report has made the prospects of a December rate increase even more likely. While there is still one more non-farm payroll / jobs number this year, but based on the record number of jobs reported in October, November will need to be a very weak number to refrain the Fed from lifting its benchmark interest rate for the first time in nearly 10 years. The unemployment rate fell from 5.1% to 5.0%, and hourly wages jumped the most since 2009.
As a trader, I don’t just think about what the markets are going to do today, but in a week, a month, or even 6 months to a several years out. What it looks like is the day of ‘easy money’ produced by the Federal Reserve is about to come to an end. The big question now is what will happen to the markets when all the liquidity gets pulled? I have put a lot of thought into this, and while I do not think any major move will happen anytime soon, I am worried about the long term position of both the US stock markets and the global markets as a whole. Russia continues to advance its military during one of its worst economic slowdowns in many years. China its trying to hold onto its 7% growth, and Europe is still printing money like mad while millions of refugees are pouring into Europe and Greece. I am an optimist at heart, but my heart is telling me something bad may be coming sometime down the road. Until then I am sticking with one trading rule that I believe trumps all, the trend is your friend.
The chart below was sent to me by a former prop-trader at Goldman Sachs. In some ways it makes sense being short the S&P, but history has a way helping change those ideas. I stuck with my call during the China sell off that the S&P would close out the year at 2200.00, and I still think that way. I do not agree with some of the “Johnny come latelys” that say S&P 2300 by year end. My reason for saying that is, most of the people saying it now, are the same people saying the markets were going to crash 3 months ago.
Last week the S&P futures pulled back from its record run. After 5 weeks of higher closes the S&P futures finally started turning south. Is it the beginning of a larger pullback, or is it just another setup to trap the seller’s? Friday’s higher than expected non-farm payroll has raised the likelihood that the Federal Reserve will raise on interest rates for the first time in 9 years in the December Federal Reserve meeting. Despite the sell off / pull back, the S&P and Dow logged their longest weekly winning streak since 2014.
Janet Yellen and the Federal Reserve have been saying they want to raise rates for the last year, and it looks like the move could come on Wednesday, December 16, 2015. One of the tools used by traders on the CME Group that has helped determine a possible rate increase is the CME Group’s Fed-fund rate futures. According to the CME’s Fed Watch tool, the Fed fund futures are pricing in a 70% chance of a rate hike in the December meeting. That’s up 12 percentage points points from Thursday’s 58% probability. The other side of the coin is that the EURUSD fell to a 6 month low, the lowest level since April 23, furthering the idea of a rate increase in December and in March. Also, movement in short term treasury rates are a good indication of a possible rate hike. On Friday the yield on the two year treasury note traded up to a high of 0.942%, the highest level since March of 2010, according to data provided by Tradeweb.
To conclude, MrTopStep still doesn’t think a rate hike is coming in 2015, but I have to admit that the current data points are clearly moving in that direction. Will a rate hike, or even two rate hikes, be bad for the markets? I don’t think so, because the Fed is going to take a slower approach in the size of the hikes. Is the credit crisis over? No, we are a long way off curing the credit crisis, and even further away from the country’s ability to pay down, or off, the nearly $20 trillion in debt the US is in.
In Asia 8 out of 11 markets closed lower (Shanghai Comp. +1.58%), and in Europe 6 out of 11 markets are trading lower (DAX 0.37%). The weeks economic calendar is light, there are only 13 economic releases, 11 T-bill ot T-bond auctions or announcements, 5 Federal Reserve Bank presidents speaking, and the markets are open Wednesday but the banks are closed. Today’s economic calendar includes a 3 and 6 month T-bill auction, and Boston Federal Reserve Bank President Eric Rosengren speech on the outlook, in Portsmouth, Rhode Island, and earnings from Dean Foods Co (DF), Magellan Aerospace Corp (MAL), and Priceline Group Inc (PCLN).
Price Action Flip
Our View: One of the things that I have learned since leaving the trading floor is most retail traders go strictly off the charts and levels. On the floor, most traders in the pit did not use charts, they had levels but they did most of the trading by ‘feel’, meaning if the S&P looked bad they sold, and if they looked good they bought. Now that doesn’t work in the pit like it used to, but I think traders (off floor) should start to try and take the news, levels, and overbought and oversold into an opinion. Don’t always go with the herd, start thinking outside the box. That’s what I did last week. I took the overall price action On November 3rd when the ES made its high, and just after it did I could see the seller’s came back in force, and the buyers lowered their ‘bid’ size. It was one of the first times I saw that in the last 5 weeks of higher closes, and I took my chances. I knew the ESZ had run most of the near term buy stops above 2100, and that the downside sell stops were building up. Sometimes you just have to stand in front of the train, and I did. Our view is there could be more downside today; sell the early rallies and buy weakness.
As always; please use protective buy and sell stops when trading futures and options.
- In Asia 8 out of 11 markets closed lower : Shanghai Comp. +1.58%, Hang Seng -0.61%, Nikkei +1.96%.
- In Europe 6 out of 11 markets are trading lower : CAC -0.54%, DAX -0.37%, FTSE -0.03% at 6:00am CT
- Fair Value: S&P -4.71, NASDAQ -5.75 , Dow -59.16
- Total Volume: 1.85mil ESZ and 4.7k SPZ
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