When you turn on your television tomorrow the talking heads on CNBC will be saying positive earnings and economic results helped push the S&P higher yesterday. While part of that may be correct it’s not the whole reason why the S&P traded and closed at all time new contract highs. We think there are a lot more reasons for the S&P going up than just that.
The first part is zero borrowing costs and all the stock buybacks. The second part is that there is no place to go but stocks and our markets is where everything is flowing. The third part is called the trend, remember the trend is your friend? The fourth part is its ‘thin.’ Trading volumes are down across the board because more people both in the US and Europe are going on vacation as the summer comes to a close. Lastly, today is the weekly S&P options expiration, and next week is the August options expiration, which shows it being historically bullish.
We could do a big overview of the day’s trade, but for most of the day, the S&P futures (ESU16) traded in a narrow 3-4 handle range. After the open there was a minor pullback. After that the ESU16 started hitting buy stops and running index arbitrage buy programs. After making the early high the ES pulled back and then rallied late in the day when the 2:45 CT cah imbalance showed BUY $720 million.
Next 40 Handles
Over 4 weeks ago I said that the next 40 handles from 2160 would be down. While I can’t say that type of pull back is in the cards right now, I can say that part of the reason the ES is not going down is because of all the ‘back and fill’ price action. The sellers / bears just don’t have enough ammo to keep the index markets going down. If you look back, the S&P usually rallies after a down day, which are few and far between.
The S&P has been stuck in a 45 handle range for over 3 weeks. Over the last 30 sessions there have only been two that closed down by ten or more handles. So where is the S&P going? Our view is that the pull back will continue to lead to higher prices, but the closer the ESU16 gets to 2200.00, the more likely some type of high made could be made. This is not to say that the S&P can’t or won’t go higher, it will, but 2200 is a big level psychologically and it’s very possible that the futures rally above and then fail.
‘Spooky’ September and October
I am not worried about August, but I am concerned about September and October. We all know about the stock market ‘crashes’ that occur at that time of the year, and with the election only a few months out, there will be a jump in volatility. My gut feeling is that it’s probably a good idea for the bulls, or the buyers, to start taking some profits the higher the S&P goes from here. The index markets are all on new contract highs, and are overbought, and over extended. The higher the index markets go from here the higher the risk.
Be smart traders. Cutting back and not getting chopped up in the low volume is a smart play. I don’t think it’s going to stay quiet for much longer, but next week only has 14 economic release, 3 fed bank presidents speaking and the July fed minutes. It’s going to be a slow one and it’s also going to be a good time to trade less and just watch.
Forgettable Volume
As if things couldn’t get any slower and quieter…they did overnight for the S&P futures. While Asia rallied, and Europe was mixed, the ESU did nothing. This mornings globex volume is the lowest of the week with 75K traded at about 6:00 am cst. It has been a tight 3.5 handle range between 2180.50 and 2184.00. Today very well looks like it could be the new slowest day of the year. If the 7:30 am cst economic numbers do nothing to move this market, which I have no reason to expect they will, then we could be in store for a memorable (or more accurately forgettable) slowest days of all time.
In Asia, 9 out of 11 markets closed higher (Shanghai +1.60%), and in Europe 8 out of 12 markets are trading higher this morning (DAX -0.15%). Today’s economic calendar includes PPI-FD, Retail Sales, Business Inventories, Consumer Sentiment, and the Baker-Hughes Rig Count.
PitBull Thursday / Friday Low
Our view: We will be looking or the PitBull’s Thursday Friday low the week before the August options expiration, but we will also be paying attention to see if today’s weekly options will squeeze people out. There are still a lot of open interest (short calls) from the 2180 level up to 2220. Our view; sell the early rallies and buy the dips. Wait to see what the guys with the better seats have to do late in the day. Next Monday’s stats are very bullish and its mid month. You can take it from there.
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 higher: Shanghai Comp +1.60%, Hang Seng +0.83%, Nikkei +1.10%
- In Europe 8 out of 12 markets are trading higher: CAC -0.11%, DAX -0.15%, FTSE -0.03% at 6:30am ET
- Fair Value: S&P -3.37, NASDAQ -3.43, Dow -46.48
- Total Volume: 1.3ESU and 5.0k SPU traded
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