Last Monday the S&P futures traded as low at 1920.75, and during Friday’s trade the futures traded all they way up to 2007.50. That’s an 87 handle rally leaving the index up 2.5% on the week and up 4.15% over the last two weeks. The advance has been backed by the higher price of crude oil and mutual funds buying stocks and selling bonds going into the first four trading days of the new month. There is a lot of doubt surrounding the rally, and that same old question we asked two weeks ago has not been fully been put to rest; is the rally real?
On Friday’s close the S&P futures (ESH16:CME) rose 4.5 handles to 1995.00, up +2.7% or +0.4% for the week, and its third weekly advance. The Dow futures (YMH16:CBOT) rose +0.40% for its third week of gains and traded above 17000 for the first time since the 10% drop that began the first week of the year lasting into the middle of February. While many market pundits think the rally was speared by an uptick in US manufacturing and continued quantitative easing measures in Europe, we believe the markets had just gone down to far to fast. As the energy sector improved, and the index markets were oversold, we think the rally originated out of the rally in crude oil that traded above $36.00 on Friday’s close. Many traders we speak to believe the rally will continue this week as the European Central Bank is set to expand its stimulus program when it meets Thursday. The European economy continues to struggle despite the use of negative interest rates. Gold also surged 4.1% on Friday, a trend we think could continue higher.
The S&P had its longest winning streak since last October. After a late push back up on Friday, the futures reversed going into the close, and were weak during Sunday night’s globex session. Around 5:00 am CT the futures traded down to the 1985.00 level and then back up to 1989.00 at 7:00 am. Last week’s economic calendar was light, but this week’s economic calendar will see a big pickup in economic reports, with the main event being the Thursday’s ECB meeting, and the week of March 14 sees a big pickup in economic activity which also also includes the Federal Reserve’s two day meeting and the March Quadruple Witching. While the rally in the S&P has all the looks and feel of a dead cat bounce, the test will be whether the futures pull back and hold, or start breaking back down. MrTopStep doesn’t think it will be that easy. Despite the fact that the March Triple Witching has been mixed over the last 28 years (5 of the last 7 have been down), and with the two day fed meeting earlier in the week, we do see some bullish clusters going into the feds Wednesday meeting. Our concern is not so much the triple witching as it is the negative stats that occur the week after the expiration. Historically, weakness in March occurs late in the month, and the end of the quarter rebalance. It’s a long month with a full 17 trading days left, and with some big events facing the market over the next 3 weeks, we want to not only look at the markets on a daily basis but also to start mapping out the potential obstacles that are facing the S&P in the coming weeks.
In the end the VIX did close under 17.00, and yes, the markets have quieted down, but that doesn’t mean the coast is clear. While I am a bull, I am just not getting the feeling that the markets are going to keep going up like that have been.
In Asia, 7 out of 11 markets closed higher (Shanghai Comp +0.81%), and In Europe 11 out of 12 markets are trading lower this morning (DAX -0%.99). The week we have a very low level of economic releases and fed speak. There are a total of 12 economic reports, 1 federal reserve bank president and 11 T-bill or T-bond auctions or announcements. Today’s economic calendar starts with the Gallup US Consumer Spending Measure and the Labor Market Conditions Index.
Our View: The futures closed weak on Friday and traded lower during the globex session. I agree the S&P has gone a long way, further than many people thought, but that doesn’t necessarily mean that the futures cannot continue higher. That said the ESH has rallied over 200 handles from its 1804 ‘retest’. Our view is that the ES will probably rally initially, but we lean to selling the early rallies and buying weakness, with the idea that today could end up a down day.
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 +0.81%, Hang Seng -0.08%, Nikkei -0.61%
- In Europe 11 out of 12 markets are trading lower: CAC -1.00%, DAX -0.99%, FTSE -1.13% at 6:00am CT
- Fair Value: S&P -1.62, NASDAQ -1.41, Dow -20.10
- Total Volume: 2.2mil ESH and 7k SPH
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