The S&P 500 futures traded all the way up to 2170.25, 190 handles off the June Brexit 1980.50 low. After an early morning rally, and a sell off in the crude oil futures (CLQ16:NYM), the S&P finally gave up to the downside. It was a low volume sell off backed by several small sell program. With a batch of favorable earnings, and existing home sales climbing to the highest rate in nearly a decade, the index markets felt tired after an over 3 1/2 week rally. The S&P futures had it’s worse day since July 5th and the Dow futures (YMU16:CBT) had climbed nine sessions in a row, its seventh record close Wednesday before the index markets sold off late in the day Thursday.
Over the last few days MrTopStep has been saying that the S&P was over extended and that the next 40 handles (points) from 2160.00 would be down, and yesterday’s overall price action, despite the low volume, seemed to be saying the futures could be reaching some type of short term high.
Over the last few weeks the connection between crude oil and the S&P gave way as crude oil tumbled and the S&P ran to new all time contract highs. With the hysteria of Brexit now in the rearview mirror the U.S. stock markets have been going straight up. Last week the S&P futures volume surged in the front month S&P futures and was averaging 1.6 to 1.7 million contracts a day. We said on the @MrTopStep Twitter feed that many of the big investment firms and traders, that ordinarily would be taking time off, had to stay at their post due to the potential shock waves that were supposed to be associated with the Brexit, but now that the smoke has cleared, many of the firms are now giving traders time off and you can see it in the big drop in volume.
According to the Stock Trader’s Almanac the S&P 500 ETF SPY has traded on average 100 million shares over the last three months and then down to 54 million shares this past Tuesday. Jeff Hirsch writes “If volatility remains subdued, average daily volume is likely to continue to trend lower as the calendar heads toward August.”
The conclusion is that it is difficult to sell stock at a decent price during the Summer months and this often leads to rallies being short lived. Jeff Hirsch of StockTraders Almanac concludes:
“Below we have plotted the one-year seasonal volume patterns since 1965 for the NYSE and 1978 for NASDAQ against the annual average daily volume moving average for 2016 so far. The typical summer lull is highlighted in yellow. Note the spike in volume that occurred in late June as a result of the Brexit vote sell-off. Prior to then volume had been slowly, but steadily declining since late April. As of last Friday, volume has already sunk to pre-Brexit spike levels.
An atypical surge in volume this summer, especially accompanied by outsized gains, would be an encouraging sign that the bull market will continue. However, should traders lose their conviction and participate in the annual summer exodus from The Street, a market pullback or correction could quickly unfold.”
Overnight, equity markets in Asia traded weaker helping the ESU16 make a low of 2156 into the equity close, but a bid in Europe pushed the index up to 2164.50 this morning, and it currently sits three handles below that. A light calendar day, with globex volume only at 135K at 6:45 cst, and it looks like more of the same today.
In Asia, 8 out of 11 markets closed lower (Nikkei -1.09%), and In Europe 9 out of 12 markets are trading higher this morning (DAX +0.08%). Today’s economic calendar is very light and includes the PMI Manufacturing Index Flash and the Baker-Hughes Rig Count.
Our View: The PitBull told me that sometimes it takes 2 or 3 weeks into the earnings season before we could see a sell off / pull back. We will all be remembered for the good and bad calls, but last year the PitBull made a prediction; lighten up and get out of positions by the final week of July. We all know what happened after that.
Look, I do not try to act like I know everything, I don’t. But I do believe that history repeats itself all the time and I do believe in seasonalities and we are heading into potentially big down months. So, should you sell all your long now? I am not saying that. What I am saying is the S&P is overdue for a health pull back to see what it’s made of and we are going right into that time of the year. Our view? Sell the rallies. The sell off that started yesterday is not over.
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 8 out of 11 markets closed lower: Shanghai Comp -0.86%, Hang Seng -0.16%, Nikkei -1.09%
- In Europe 9 out of 12 markets are trading higher: CAC +0.27%, DAX +0.08%, FTSE +0.42% at 6:30am ET
- Fair Value: S&P -6.11, NASDAQ -7.04, Dow -78.59
- Total Volume: 1.3m ESU and 3.8k SPU traded
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