Yesterday, after opening up 25.50 handles at 2084.25, the S&P futures ran up making a high at 2092.50 in the first hour. From there the index made a series of lower highs and lower lows into the last hour when the the index plunged lower trading to 2071.25 in the closing minutes. A day that seemed so bright had such a nasty close as it was announced that two Brexit polls would be released at 4:00 pm CST leaving traders unable to buy into the gap up in a frame of mind to sell as risk would be removed from the table. Crude oil traded up to nearly $50 on the August contract, meanwhile, gold futures held up well given the risk off move closing lower by just $10.
After the close two polls were released showing mixed results. What we are gathering from all this is that voters are very uncertain, and this creates an uncertain market, but for the moment no one seems to be afraid anymore. There is a large undecided factor, and it seems that as voters in Great Britain are becoming more educated concerning an exit, the move to maintain the status quo is gaining traction. As I said yesterday, I suspect there will be a whole pile of headline risk this week. As the Asian markets were an hour from opening last night Morgan Stanley released a note stating: “Brexit could push global GDP growth below 3%, re-entering danger zone for global recession (recession threshold 2.5%).” The ESU jumped up nearly ten handles after the Brexit polls were released and it seems that the “perceived” threats are subsiding. One thing I gathered throughout this polling is that there are some inaccuracies, and even when they had the leave camp up 10% I said that it would be close, and now it seems like it will be going down to the wire. What I don’t know is if the S&P is paying attention, it seems that equity traders just are not concerned about the risks any longer.
I was talking to some forex traders and they were noting the extreme bid/ask spread on some of the majors last night. Meanwhile, in the U.S., forex brokers are raising leverage minimums this week and even futures brokers are doubling the usual required margin for an entire complex of instruments. Even if equity traders are shrugging off the risk it seems that risk managers are very much alarmed by the possibilities. How much longer can the S&P hold up as it has once again failed the 2100 level? I don’t know, but what does seem to be the obvious is that we cannot trade from conviction right now, but rather by what price and volumes are telling us. MrTopStep thinks it’s best to limit if not eliminate overnight holdings, to use tight stops, and as always, do not fall in love with your positions!
Overnight, Asian markets were mostly higher, and European equities were moderately firm just two days before the Brexit vote. The S&P futures gapped lower on the 5:00 pm cst open last night and worked the entire session to get back to the 2083 area where the futures initially spiked after the polls were released. Currently the ESU16 is up 10.25 handles from yesterday’s cash close at 2084.50 on 150k volume at 5:45 am cst.
Heading into this mornings cash open we will see if sellers can create a lower high from yesterday and then push to make a lower low. Meanwhile buyers will need to keep a steady grind throughout the day to push the index back to the 2092 area. One thing that was lacking yesterday was any real buy programs, and at the close, the MOC was flat. I think that the institutions are sitting on the sidelines until after the vote. This means that speculation will likely lead to swings in both directions while lacking the large money to provide conviction to these markets. Likely more algo and HFT driven this week than anything else.
In Asia, 7 out of 11 markets closed higher (Nikkei +1.28%), and In Europe 11 out of 12 markets are trading higher this morning (DAX +0.55%). Today’s economic calendar includes Redbook, Janet Yellen Speaks, a 4-Week Bill Auction, a 52-Week Bill Auction, and a 5-Yr Note Auction.
Our View: Yesterday, our view was to sell the early rally and buy late strength, this worked well in theory. Today, I again think that selling the early rally is the best look without buying the weakness. The market now seems to be comfortable with the headline risk and uncertainty, and eventually this week it will catch up to them, and sell stops will be run. Again like yesterday, we suggest trading smaller and to avoid holding overnight except on small positions with profit cushions and stops in place. MrTopStep is looking for a lower high today and a lower low.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 out of 11 markets closed higher: Shanghai Comp -0.35%, Hang Seng +0.77%, Nikkei +1.28%
- In Europe 11 out of 12 markets are trading higher: CAC +0.72%, DAX +0.55%, FTSE +0.05% at 6:30am ET
- Fair Value: S&P -8.60, NASDAQ -8.75, Dow -100.52
- Total Volume: 1.6m ESU and 4.7k SPU traded
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