In most cases, the markets tend to go quiet and the volume drops the day before a major event, and that was the case when it came to yesterday’s S&P 500 futures trade. Only 1.3 million ESU16:CME contracts were traded.
Over the multiple week rally the S&P 500 futures were in a grind higher doing anywhere from 900,000 to 1.2 million contracts a day. On some days the futures exceeded 1.2 million but not by much. When the ESU started to fall the volume started to jump doing as much at 1.8 million contracts a day. That’s how it works, larger volume is produced when the markers sell off, and the volume drops when the markets rally, but that was not the case yesterday. A late day drop pushed the volume to over 1.3 mil but the volume piled on late in the day as the futures rallied.
It was a wild Globex session. Initially the ESU16 traded above 2106 to 2108 and then shot up to 2119.25 when the polls showed 52% to 48% to stay, but as more votes were counted the polls swung the other way, and in came the sell programs. As the S&P sold off it was clear to see by the volume many had lowered their risk. The ‘ladder’ that shows the size of the number of contracts either bid or offered was at times less than 20 to 50 contracts. The other part that was clear was that the European Union was totally caught off guard.
Going Down Hard
As the S&P fell it initially held the 2049.75 and bounced, but as more headlines hit the tape the futures traded back down through the 2050 level and kept going down to 1999, down 5%, or limit down. The British pound traded as high as 1500.00, and as low as 1322, its lowest level since 1985. This helped push some of the European indices like the DAX down as much as -10%, the FTSE down almost -8% and the French CAC fell almost 5%. As stocks fell around the world gold and safe haven currencies rallied sharply as the leave camp secured its victory in the UK referendum. The Sterling was down as much as 8% against the dollar but paired some of it losses. Gold was up 6% at $1,336.80, and the FTSE that fell 7% in the early goings paired some of its losses and ended up one of the best performing European indices ( down -4.83% at 5;45 CT). It was clear to see that the over confidence in the UK to stay within the EU caught traders off base in the early hours of the morning. It was also clear to see people underestimated how many would vote to leave.
All week I had been mentioning the fact that political outcomes can never be assumed and gave an example from 2008. I mentioned how it didn’t feel right that these polls would swing so strongly over a weekends time, and that populations don’t tend to do this. I also mentioned the large undecided voters that people seemed to be ignoring. Lastly, I mentioned that after the ‘buy the rumor sell the news’ was going to set in place, and what we saw was a perfect storm of reality. This storm caught all those who assumed that the remain side would win off guard and what we saw enter the equity futures was indeed panic as the ESU16 traded limit down to 1999. I knew when the futures ran to 2119.50 early in globex that this was not a good sign.
The question now becomes, how low will this market go? Or will this be seen as a major dip buying opportunity? I would imagine that some overseas parties will need to liquidate funds in the U.S. this morning, and that the futures are going to see a retest of the overnight high, and then possibly go limit down on the regular session. At the same time, I don’t see the world ending just yet, and I think that once the dust settles this is going to be seen as a buying opportunity for some, I’m just not sure how long that will last.
With equities heading into the time of seasonal slump, typically summer gains are limited and bring on late summer weakness. Surrounded by the uncertainty of the U.S. Presidential election coming up this fall, and a continued state of confusion from our chief monetary policy makers from the Fed, the S&P does not currently appear to be on very stable ground. I’m not calling for fear or panic but at moments like these you have to look at both sides of the coin and consider every possible idea. For now, during a weak seasonal, the S&P has to maintain 2000 then climb back over 2050 to push back to 2100 and then get to this year’s 2120 highs to make a push to new all time highs. Can it do it? It’s possible, and if it trades again above 2100 I’m not sure it can be stopped, but at the same time, it has a lot of resistance built up. As the dust settles we will get a better idea of investor sentiment and have an idea of what to fade.
In Asia, 11 out of 11 markets closed lower (Nikkei -7.92%), and In Europe 12 out of 12 markets are trading lower this morning (DAX -6.63%). Today’s economic calendar is light and includes Durable Goods Orders, Consumer Sentiment, and the Baker-Hughes Rig Count.
British FLASH Crash
Our View: One of the things that stands out were the estimates of where the S&P could go after the vote. In the last two or three days I put out the level people gave me for where they thought the S&P could go and what stood out was that there was way less concern about the upside and more concern about the downside. The highest upside level we put out was the 2120-2130 level, but on the down side the projections went anywhere from 2040 down to 1970. This told me that no matter what the vote ended up that there would be some form of selling the news. I went on Periscope last night and said the S&P could potentially see some type of ‘flash crash,’ and that’s not only how it looked, that’s exactly what happened. The ESU16 sold off a total of 120 handles and bounced 44.50 handles back to 2043.50. Our view is there is going to be a lot of movement and that a retest of the 1999 Globex low can not be ruled out. We lean to selling rallies and buying weakness with the idea that the decline is not over.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 11 out of 11 markets closed lower: Shanghai Comp -1.30%, Hang Seng +2.92%, Nikkei -7.92%
- In Europe 12 out of 12 markets are trading sharply lower: CAC -7.86%, DAX -6.63%, FTSE -4.96% at 6:30am ET
- Fair Value: S&P -8.26, NASDAQ -7.80, Dow -98.01
- Total Volume: 1.3m ESU and 5.8k SPU traded
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