Around 12:00 pm on Tuesday the S&P 500 futures (ESU16:CME) traded down to the 2009 level. At 2:20 pm Wednesday the futures made a new high at 2061.50, up 33.25 points, or + 1.65%, and up 52 points from the 2009 low made on Tuesday. Last week I did a video that said the S&P would sell off and that when it was done it would start going back up. While there are still many hurdles to overcome with the British and their EU exit the U.S stock market is pushing back on the final trading days of June and the second quarter. It was an amazing two day decline.
Over Hedged and End of the Quarter Rebalance
There are probably hundreds of reasons why the S&P stopped going down in the last two days. The first part, and maybe the most important part, was the big accounts being over hedged. Initially we saw that last Thursday night when the futures popped up to 2119.50, the next time we saw it was late Tuesday, and then again all day yesterday. The second part is the Brexit exit happening at the end of the quater. And the third part is with stocks down and bonds up so much the institutions have been buying stocks and selling bonds. It has been all risk off, but as the markets head into the final trading day of the second quarter, it looks like the mutual funds are putting money back to work in the stock market.
So where should investors put their money? It can’t go to Asia, and it can’t go to Europe, so where does it go? Back into US stocks, that’s where it goes. We have seen this type of risk on – risk off trade many times throughout the credit crisis and it always seems like it comes back to the US and the S&P. If the S&P holds up, which it looks like it will, it will have gained in the last 3 quarters. While the gains are miniscule, they are gains, and with all the economic turmoil that doesn’t seem so bad. Are the markets out of the woods yet? Not according to the IMF which says Deutsche Bank is the riskiest bank in the world. According to the US Federal Reserve bank ‘stress test,’ all but two of the 33 banks passed the test, Deutsche Bank and Bank Santander failed again. One of the things I continue to talk about is how we live in an ever changing monetary environment and I do not think that is going to change. Is Brexit over? I hardly think so, but for now, the S&P is back to making good of bad new. As of this morning the S&P the futures have rallied 93 handles in less than 3 days. The event is another great example of the markets going down to fast. The bounce back is what happens when everyone gets off base.
2073.75 Globex High
Overnight, global markets maintained a weaker bid as most worldwide indexes closed just slightly higher. The ESU16 made an early 2056.50 low before rallying back to make a new session high of 2073.75 and is currently trading at 2068.00. With the end of the month trade, and a 93 handle rally in less than three full sessions, there could be some profit taking into the end of quarter. At this point, it is more difficult to suggest a retest of the lows, but some trade back to 2050 area would at least be orderly.
In Asia, 10 out of 11 markets closed higher (Hang Seng +1.75%), and In Europe 9 out of 12 markets are trading higher this morning (DAX +0.10%). Today’s economic calendar includes Weekly Bill Settlement, 2-Yr Note Settlement, 5-Yr Note Settlement, 7-Yr Note Settlement, 30-Yr TIPS Settlement, Jobless Claims, Chicago PMI, Bloomberg Consumer Comfort Index, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, James Bullard Speaks, Fed Balance Sheet and Money Supply.
Beware The Walk Away
Our View: Generally we talk about a tough week or month, and seldom does the S&P move down so hard and rally so fast, but that’s how this works now. Once the news algos exhaust, the short cover rally begins. It’s just one big ‘water in the bathtub’ trade, blow out the sell stops on the downside, and then blow out the buy stops on the upside. Today we have another heavy round of economic reports to get past, but I get the feeling the there could be another shot to the upside. According to the Stock Trader’s Almanac the final trading day of June has the Dow down 17 of the last 24 occasions and the Nasdaq down 6 of the last 10. The first trading day of the third quarter and the first trading day of July (Friday) has the Dow up 21 of the last 26 occasions with an average gain of +0.50%. Our view is to sell the early rallies and buy weakness but also be on the lookout for some type of ‘walk away’ trade.
As always, please use protective buy and sell stops when trading futures and options.
MrTopStep Market Update with Nasdog.com
https://youtu.be/P7jQJRwS6E8
- In Asia 10 out of 11 markets closed higher: Shanghai Comp -0.07%, Hang Seng +1.75%, Nikkei +0.06%
- In Europe 9 out of 12 markets are trading higher: CAC 0.55%, DAX +0.10%, FTSE +0.20% at 6:30am ET
- Fair Value: S&P -9.10, NASDAQ -10.48, Dow -108.84
- Total Volume: 2.m ESU and 6.3k SPU traded
[s_static_display]
No responses yet