Crude Reality
The largest down day for the S&P since the November election was back on November 28th, the Monday following Thanksgiving, when it closed down 11.75 handles (points). After OPEC got an agreement to lower production from non aligned oil producers over the weekend, oil traded above $54.50 on Globex Sunday night, which in turn pushed the S&P futures up to a new all time high of 2264.75. But the rally did not last very long in the S&Ps.
After making the new high print on the Globex open, the ESH went offered down to 2249.75, a 15 handle turnaround and then opened the regular session at 2252.75, down three handles from Friday’s final print. The S&P futures saw some early buy programs in the cash session, pushing the index futures back up to 2259.00 early, but that would be the high of the day. The index turned to the sell side pushing the futures down below 2250 to 2246.75 at noon EST, and then proceeded to trade the afternoon in a tight and quiet range before settling the day at 2250.00, down 4.75 handles with a market-on-close imbalance of $975 million to buy.
Expect The Unexpected
When all was said and done, it was a mixed day. Bulls made a new all time high, kept some support in the S&P’s, and capped off the day with a MOC close to buy $1 billion, which helped the ES settle above 2250. Meanwhile, bears rejected the overnight highs, then made a lower high in the regular session. As the two day Fed meeting begins today, what really lingers on traders minds isn’t so much what the Fed will do, or even say. It’s assumed that the Fed will raise rates, and a failure to raise at this point will be the more unstable event in the markets. Even if the Fed speak is hawkish, no one takes the Fed too seriously anymore concerning projections for next year.
What is more relevant in the minds of traders is which side is more vulnerable, where will the stops be? Will the index futures be at all time highs, get the bus too full with another push up and empty out the shorts, then turn lower and run those sell stops? Will the market give a false break lower, suck in more shorts, and then push the buy stops higher? Or, will the markets remain mostly quiet, but then begin to trend late in the month?
What we have learned from Brexit, and the November elections, is that anything can happen in the electronic age of the financial markets. Even last week when large orders were responsible for pushing the S&P’s higher during the quiet New York lunch hour reminds us of the invisible hands that are in charge. For now, the bulls are doing what they need to do, that is continuing to build a floor at 2250. To attack higher prices and start to push up and validate the 2264.75 high in regular session. Meanwhile, bears have started to drop the ball, once again, and are losing every technical battle.
While You Were Sleeping
Overnight global equity markets received a small lift both in Asia and Europe. The S&P 500 futures have seen a “turnaround Tuesday” type trade after opening the globex session at 2250.25. The ESH found an early low at 2247.75 and have since been in a grind higher, printing the overnight high of 2258.00, a 10.25 handle bounce just after 5:00 am cst. The last print is 2256.50, up 6.00 handles on the session, with volume at 162k as of 5:51 am cst.
Muted Reaction?
Today begins the two day Fed meeting, and aside from that, the calendar is quiet. The expiration stats show the December quad witching having good historical stats, closing higher this week in 25 of the last 32 years.
While what really will make a difference in price action will be the response to the Fed meeting tomorrow, Barclays did release a research note yesterday suggesting that the response to this FOMC should be quiet as the markets assume the outcome. MrTopStep believes the market will do what hurts the most people, and if traders are positioning for a move, then it’s quite possible that the reaction will be muted.
The VIX closed at $12.42 yesterday, and is not suggesting any heightened concerns going into the Fed meeting. The fact that volatility is so low concerns me from another angle, as so many traders may be caught off guard by a move, and that may be what hurts most traders. Remember the old saying, “when the VIX is low, it’s time to go.”
Asia and Europe
In Asia, 8 out of 11 markets closed higher (Nikkei +0.50%), and in Europe 9 out of 11 markets are trading higher this morning (DAX +0.75%). Today’s economic calendar includes FOMC Meeting Begins, NFIB Small Business Optimism Index, Import and Export Prices, Redbook, a 4-Week Bill Auction, and a 30-Yr Bond Auction.
Our View
The bulls have the bears by the short hairs. Like it or not, there has been little to no reprieve for the short sellers. It truly reminds me of the days / weeks leading up to the 1987 Crash. Today, the Tuesday of the December options expiration, has the S&P cash up 18 / down 13 of the last 32 occasions. Wednesday is up 17 / down 14 of the last 32 occasions, but both days will be overshadowed by the Federal Reserve’s two day meeting and Wednesdays rate hike.
Download all of the December expiration stats here
How will the rate hike play out in the (ESH17:CME)? Based on the current price action, it could end up more of the same, a small drop and then rally. Yesterday I was up 8 handles on my position, and the futures fell a little right after Globex opened, but then they started going up. At the high, the futures were 3.5 handles against me, and just started coming back down a little to 2256. I know the markets look great, at last night’s high the (YMH17:CBT) was only 191 points away from Dow 20,000. Hard to imagine that only 6 months ago Brexit had the ES down to 1980, and just over 5 weeks ago, after Trump won, it traded down to 2028.50. As the saying goes, this train left the station.
Our view is to sell the early rallies and buy weakness. It should be fairly slow until tomorrow at 1:00 when the Fed markets its announcement.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 8 out of 11 markets closed higher: Shanghai Comp +0.07%, Hang Seng +0.06%, Nikkei +0.50
- In Europe 9 out of 11 markets are trading higher: CAC +0.66%, DAX +0.75%, FTSE +0.52% at 6:00am ET
- Fair Value: S&P -5.09, NASDAQ 0.57, Dow -58.47
- Total Volume: 1.0m ESZ, 1.9m ESH and 19.9k SPZ, 16.9k SPH traded
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