Trump Takeover

Santa Claus came early this year, and Donald Trump is helping. Yes, the economy is improving, but the raucous Trump is causing is pushing big name stocks like Rio Tinto Plc (NYSE:RIO,) the industrial metals and minerals company from the basic materials sector, through the roof.

While some may say it’s the economy that’s improving, I think it’s more about the expectations of higher rates, improving bank prices, potentially big infrastructure projects, and just a general shake up of how the US government works. The CEO of U.S. Steel wants to accelerate investments, bring back jobs, and is saying his firm could put as many as 10,000 people back to work. Like Donald Trump, or not, he has already shown that the wants to make ‘America Great’ again, and some are saying he is already taken over as president of the United States.

The shake up is having a very positive effect on the markets. Is it all Trump? No, it’s not, but shaking up the status quo is having a positive effect. Over the last four days the (ESZ16:CME) has gone from a sell off down to 2179.00 on Sunday night’s Globex open, and rallied all the way up to 2251.25 vs. the December contract. That is a 72.25 handle rally in four sessions, with most of it coming over the last two trading days.

Money Is Back To Work

While no one saw Wednesday’s +1.5% gain coming, the oversized upside volume of 2.5 million ESZ16 traded told a story, and that story was billions of dollars being put to work in the S&P 500. Like I tried to explain on yesterday’s Periscope, there are a lot of big institutional firms that are not fully vested. Rather than try and pick individual stocks with the markets up so high, it’s a much easier play to just buy the S&P, and that’s what happened. The big institutional firms have been piling cash into the index futures markets.

Most people thought after Wednesday’s big push up that yesterday could see some type of sideways to lower trade. That didn’t happen. After an early dip, the futures did exactly like they have been doing, sell off a little and then rip higher. While we did not see any ‘glitches’ like we saw on Wednesday, there was some buying that stuck out. During the 11:00 cst hour four separate orders came in buying 10,000 (ESH17:CME) in 1 minute intervals. I believe it was the same big account that was doing all the buying on Wednesday.

Margin Call

Around mid day when the (ESH17:CME) was making new highs, several traders I talk to were trying to figure out what was causing the push higher. No one on CNBC or Bloomberg had had a clue, but I did. Around 11:30 CT, as the (ESZ16:CME) started trading above 2245.00, CME Group clearing firms put out ‘Intraday margin calls’ for the premium sellers in the S&P that were short puts and calls.

As the futures rallied over the last week, the ‘downside puts’ went to dust, but the upside short calls that no one was worrying about earlier in the week came into play. When that happens the owners of the accounts have three options; put up more money to hold the positions, roll the positions higher, or liquidate. All three have an overall bullish effect, and that played out as the ESZ traded above 2250.00. After the margin calls were satisfied, the futures sold off a little.

ESZ16 2250

After a strong trend day higher on Wednesday, it would have been somewhat normal for the S&P 500 futures to take a breather yesterday. However, the benchmark futures opened the regular session on the March contract at 2234.50, up 3.25 handles, then traded up to 2138.50 high early in the session. The ES fell back to 2231.50 in the first hour, and was looking weak, until buy programs started showing up at the conclusion of the first hour of trade.

The buy programs pushed the ESH up to 2246.00 going into 1:00 pm cst, and up to 2251.50 on the Dec contract, before seeing a pullback down to 2236.75, three ticks shy of 10 handles. The futures rallied back to 2243.00 going into the close, even on a market-on-close imbalance of 300+ million to sell. At the end of the day, the futures settled at 2242.00, up 10.75 handle from the prior day’s close, and a new high on both contracts.

No Shorts Allowed

It was another day where we could just feel early on that no shorting was allowed. Any attempt to trade a top in this index would eventually lead to more fuel for the algo’s stop run fire. The 2250 level did give trouble on the Dec contract on its first two trades at or above that level, but after more than a 70 handle bounce from Sunday night’s low, it was natural that the S&P’s would have to find resistance somewhere.

We had been saying since last week’s financial withdrawals, via MOC orders, that money would have to be put back to work. It hasn’t happened on the close, but money has appeared in buy programs the last couple sessions, and in the form of market-on-open imbalances.

After stumbling a lot since the 2135.00 high during May 2015, many traders had given up on the idea of a trending equity market rolling in new all time highs like a couple years ago, and whether it is Trump, or because it was overdue, the result is the same. Next week the Fed will be raising interest rates, and this week’s action is going to lead to a run on sell stops, or more buy stops when the market fails to go lower.

While You Were Sleeping

Overnight, the trade has been quiet in global stock markets, as the week has been closing in Asia and Europe without a clear Friday direction. In the S&P futures, the bulk of the roll was done yesterday, with nearly 800k spreads completed, and today will likely be at least an additional 500k. During globex, the futures have traded in a 3.75 handle range between the 2243.50 high early in the Tokyo session, and the low of 2239.75 early on the Euro open.

In Asia, 6 out of 11 markets closed higher (Nikkei +1.23%), and in Europe 8 out of 11 markets are trading higher this morning (DAX +0.12%). Today’s economic calendar includes Consumer Sentiment, Wholesale Trade, and the Baker-Hughes Rig Count.

Our View:

The Friday before the December expiration stats show today being up 19 / down 13 of last 32 years. Yes, that’s bullish, but it’s hard to see how the S&P can just keep going up as it’s been doing. Clearly, the S&P is too firm to sell, and up too high to buy. Fridays have not been all that great for the S&P, and 7 of the last 9 Friday’s have closed lower,, with one of the two closing higher by a single tick. Our view is that we think there could be some type of pull back / sell off today. You can take it from there.

Download all of the December expiration stats here

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 6 out of 11 markets closed higher: Shanghai Comp +0.54%, Hang Seng -0.44%, Nikkei +1.23%
  • In Europe 8 out of 11 markets are trading higher: CAC +0.51%, DAX +0.12%, FTSE +0.19% at 6:00am ET
  • Fair Value : S&P -6.16, NASDAQ -0.96, Dow -65.79
  • Total Volume: 2.1m ESZ, 800k ESH and 12.6k SPZ, 9.1 SPH traded

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