The S&P 500 futures rallied sharply yesterday making good of some terrible news. The S&P was already on the down-swing going into Friday’s close when news hit the tape of several terrorist attacks in France. The S&P futures ESZ15 made a low of 2011.50 and settled at 2018.60, down 22 points, sold off down to 1998.50 on Globex Sunday night, and then roared higher. The rally was a combination of the S&P going down too much too fast, and traders selling at low prices expecting more follow through on the downside.
Event Driven Lows
There have been multiple times throughout history when there have been event driven lows, and yesterday, despite the tragedy in France, the markets reversed and made a strong move higher. It’s sometimes very hard to figure out, but at certain stages of a decline the markets are looking for ‘news’ that can cause sharp drops, or turning points, to help form a low. As sad as the French attacks were, the S&P futures (ESZ15:CME) closed up 30 handles, gaining +1.5%. The Dow Jones futures (YMZ15:CBT) closed up 215 points, gaining +1.31%, and the NASDAQ futures (NQZ15:CME) closed up 57.75 points, gaining 1.34%. Crude oil futures traded up to $42.25 and settle at $41.74, up 1.00 points, gaining +2.80%. What happens is the shorts were piling in last week, and then shorted more S&Ps in response to the terrorist attacks Sunday night. When the ESZ15 started moving lower Sunday night, the late shorts piled in, the weak longs were shaken out, leaving a market overwhelmingly short biased, and at the end of the day that was their vulnerability.
While commentators on CNBC seemed to be baffled at one point how the equity indexes could be going higher the first session after the French terrorist attacks, Birinyi Associates released a study during the day countering the notion that all terrorist attacks are followed by selling. Other times there are even event driven highs on positive news that signal for reversals. One such example is the 2011 high made on May 2 on the Osama Bin Laden death announcement. The cash indexes made a high for the year and then proceeded to go into correction mode from there. Below is from our friend Jeffrey Hirsch noting market reaction to specific global events.
Lows Are In
About two weeks ago I started telling the IMPRO room, our readers of the Opening Print, and social media followers, that my gut was telling me the ESZ15 was making a short term high above 2110 and needed to trade back down to lower prices before resuming higher. What we got was more than I imagined in a 115+ handle pullback accounting for 5%. After watching the ESZ sell off so much, and then open the globex session Sunday night gapped down and finding an early low below 2000, my gut began to tell me that this move lower was overdone. Sentiment was turning bearish, and now the “bus was too full” to the sell side. As a result of this the S&P’s aimed for upside buy stops, seeing a 50 handle rally from that globex low to the close of Monday’s trading.
Is it over? We cannot say for certain, and we will not rule out a retest, but I said early on in November that every pullback would be a gift, and with the historical seasonal strength set to kick in this week, I believe that the worst is over and we can start looking for a move back to the 2100 level.
Seasonals
From StockTraders Almanac: “Trading around Thanksgiving has a bullish tendency perhaps buoyed by the ‘holiday spirit’ that was first published in the 1987 Stock Trader’s Almanac. For 35 years prior to 1987, the Wednesday before and the Friday after Thanksgiving combined were up 33 times. The only declines were in 1964 and 1965.”
“Subsequently, this trend changed. In the 27 years since 1987, there have been 11 declines and 16 advances. The best short-term trade appears to go long into weakness next week or on Monday of Thanksgiving week and selling into any subsequent rally by the end of Thanksgiving week, but remain nimble as events like Greece’s debt crisis in 2011 can cancel Thanksgiving on Wall Street.”
“Also of note is the change in the year end rally. Prior to 1987, from the close of trading on the Friday after Thanksgiving to yearend, the DJIA rallied only 18 times in 35 years. As Thanksgiving bullishness lost steam in 1987, the rally afterwards occurred more frequently. Since 1987, DJIA has logged gains in 22 of 27 years from the close on Friday after Thanksgiving to year end.”
In Asia 10 out of 11 markets closed higher ( Hang Seng +1.15%), and in Europe 11 out of 12 markets are trading higher (DAX +1.88%). Today’s economic calendar includes the Consumer Price Index, Redbook, Industrial Production, Housing Market Index, E-Commerce Retail Sales, Federal Reserve Gov. Jerome Powell speech to Clearing House Payments System Risk Symposium, in New York, Federal Reserve Gov. Daniel Tarullo speech on shadow banking, in Washington, Treasury International Capital and earnings from Dick’s Sporting Goods Inc (DKS), Home Depot Inc (HD), Jack In The Box Inc (JACK), La-Z-Boy Inc (LZB), and Wal Mart Stores Inc (WMT).
Our View: These markets are very unforgiving. One way or the other they always catch the shorts selling at low prices and that’s why the futures never went down that much, everyone was already short and sold more. Figuring out overbought and oversold conditions can be the best indicator a trader can have. Today we have several economic reports and retail earnings out of Wal Mart, a sector that has been beaten up bad recently. After a 52.5 handle rally yesterday it would be hard to believe the futures can rally again, but it’s the November options expiration week and the (CLZ15:NYM) expires today, and that always makes for some big moves. Our view is that we think the low of this sell off is in and that any pull backs are going to be bought by the large investment / mutual funds for the year end mark up. We lean to selling rallies and buying weakness but we also want to see how Wal Mart reports.
See all of the November expiration stats here…
As always; please use protective buy and sell stops when trading futures and options.
MrTopStep Mid-Day Update with Top Notch Trading
- In Asia 10 out of 11 markets closed higher : Shanghai Comp. -.06%, Hang Seng +1.15%, Nikkei +1.22%.
- In Europe 11 out of 12 markets are trading higher : CAC +2.27%, DAX +1.88%, FTSE +1.90% at 6:00am CT
- Fair Value: S&P -3.46, NASDAQ -1.79, Dow -45.82
- Total Volume: 1.7mil ESZ and 7.1k SPZ
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