As the markets begin to adjust to the ‘new reality’ of higher rates and a weaker Chinese currency the S&P 500 futures are reacting in kind to the downside. If there is anything traders know for sure it’s that volatility continues to remain high and fear is widespread. On the close the ESH16 had a 56.50 handle range from 1871 to 1927.50 and settled at 1914.50, up 33 handles, or 2.15%. The Dow Jones futures (YMH16:CME) made a daily low at 15980, then rallied up to 16391, and ended the day at 16281. The Nasdaq 100 futures (NQH16:CME) trading range was 4124.00 to 4300.50, closing at 4257.50, up 2.0% on the day and down 7.2% on the year.
While there have been many times that the stock market began a year trading noticeably lower, there has never been a time that I remember such large moves coming so early. From yesterday’s low to high the ESH16 rallied a total of 56.50 handles. The ES was holding strong late in the day, but when crude oil had risen sharply during the CLG options expiration and started to sell off late in the day, the ESH sold off from the 1927.50 high down to 1911.00, closing well off its daily highs. One of the things about the big rallies is the futures inability to ‘hold’ the rallies, and last night the ESH nose dived back down to the 1875.25 level, 4.25 handles off yesterday’s low. The big question; how long will the markets go down?
Half Way Through the Bear Market
From its low to it’s high the ESH rallied 56.5 handles and has sold off back down to the 1876 handle during the overnight Globex session. As I have been saying Iran oil exports go back online soon. I still do not believe crude oil is going to $10, or even $20, and I still believe there will some type of capitulation low, but the level of volatility is so extreme that it’s hard to see the silver lining. The weak start to 2016 and the ensuing bear market have the public scared, but according to Ned Davis, the S&P’s decline from its June 23 high to present is already half the length of an average bear market. There have been 206 calendar days since the S&P made its high and as you can see by the chart above its already more than half the length of an average bear market. According to Ned Davis there have been 35 bear markets since 1900 with an average length of 403 days. While we know the S&P needs to drop 20% of be an official ‘bear’ market the current price action surely is not an indication of the S&P making a low.
In conclusion, the markets act terrible, but if you look at Ned Davis’s chart above the current decline is already half over…but that doesn’t mean the S&P can’t trade down to 1860 or 1820, or even lower, before the bear goes back into hibernation.
ESH16 in 2016
5 of the first 9 sessions on the year have traded lower, being down a total of 165 handles, that’s down -8.0%, or down -12.5% from its June 23 2134.00 high.
Jan 4th -26.50
Jan 5th +2.75
Jan 6th -25.75
Jan 7th -53.00
Jan 8th – 21.50
Jan 11th +2.75
Jan 12th +10.75
Jan 13th -43.50
Jan 14th +33.00
In Asia, 9 out of 11 markets closed lower (Shanghai Comp -3.55%), and in Europe 12 out of 12 markets are trading lower (DAX -1.41%). Today’s economic calendar includes PPI-FD, Retail Sales, Empire State Mfg Survey, New York Federal Reserve Bank President William Dudley speech to Economic Leadership Forum in Somerset, New Jersey, Industrial Production, Consumer Sentiment, Business Inventories, San Francisco Federal Reserve Bank John Williams opening remarks and Q&A at economic forecast conference, in San Francisco, Baker-Hughes Rig Count and Dallas Federal Reserve Bank President Rob Kaplan conversation in Dallas.
Our View: There is an extremely high level of economic reports/Fed speak this morning and it’s the Jan options expiration. After trading all the way up to 1927.50 the EHS sold off down to the 1911 on the 3:00 cash close, then continued to sell off down to 1876 this morning. Lets face it, just when you begin to think things are going to level off, the ES tanks again. I have to admit that I was starting to think the ES could start going higher into the expiration and the three day weekend, but you just can not rule out a retest of yesterday’s lows. I can personally say that other than the extremes of the credit crisis I have never seen the S&P move like we have been seeing in the start of 2016. Our view; buy the early weakness and sell the rallies.
‘S&P 500 Futures; Mid-Month Rebalance and the Crude Oil Options Expiration Squeeze Job’
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 9 out of 11 markets closed : Shanghai Comp -3.55%, Hang Seng -1.50%, Nikkei -0.54%
- In Europe 12 of 12 markets are trading : CAC -1.44%, DAX -1.41%, FTSE -1.48% at 6:30am CT
- Fair Value: S&P -7.41 NASDAQ -8.79 Dow -88.05
- Total Volume: 3 mil ESH and 12.5k SPH
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