While I hate to say “in the old days,” it is a way to reference how the markets acted in the past versus how they act today. On a day when nothing should have happened, the S&P futures marched higher, sold off, and rallied again late in the day.
It’s not been easy reading the markets over the last few weeks. All the sell programs had the S&P looking like it was going back down again. On Wednesday the S&P hit sell stops down to 1597.50, but the buyers came out in force later in the week, creating another false start for the bears.
Despite all the ups and downs, the Dow and S&P both managed a gain of +1.5% on the week. The Dow gained 226.24 points, or 1.52%, to 15,135.84 and up 18.5% year to date . The S&P gained 25.61 points, or 1.59%, to close at 1631.89, up +20.46% year to date, and the Nasdaq Comp. gained 76.13 points, or 2.24%, to close at 3479.38, up 18.45% YTD.
Record $80 billion pulled out of bond funds
Investors have been bailing out of bond mutual and exchange-traded ETFs at a record pace. After five months of net inflow, $80bil was pulled in the month of June alone. Investors got spooked by Federal Reserve chairman Ben Bernanke’s announcement that the central bank could start “tapering” its bond purchase program later this year. Even with nearly three-quarters of this year’s inflows being pulled, it is nothing compared to the $1 trillion investors poured into bond funds since the financial crisis started in 2007.
On the floor of the CME Group, bond futures continued selling off Friday, down a full point even before the jobs numbers were released. The bond traders we talk to on the floor said they know it does not make sense to be a buyer because as rates go up the bonds will lose value. Several interest rate traders we spoke to said they felt Friday’s number was leaked and that’s why the bonds were down over a full point before the number and the S&P jumped just before the number was released.
In the last 3 or 4 weeks the bonds have fallen from 148 down to 132. At the same time bond and Treasury note yields are still going up. The yield on the 10-year rose 0.23 percentage points on the week to 2.72%. During the past two months, Barclays iShare 20+Year Treasury bond fund (TLT) is down 11% while the yield on the 10-year has gone from 1.6% in May to 2.72% last Friday.
Second half of 2013
We all know that when better numbers come in, like Friday’s jobs report, it means the Fed has another excuse to slow down its asset buying program. And we all know what everyone expects when that happens, but let’s take the little picture and apply it to the big picture.
Friday’s jobs number came in higher than expected. Good, right? Well, it was a good number, but that doesn’t mean the S&P is just going to go straight up.
It has to do a flunk-a-dunk first. Yes, that’s the technical term. Get everyone thinking the markets are going to puke and get everyone short.
This is very important to understand and it actually has little to do with the actual direction. When everyone thinks the same way, the algos and programs think the other. As soon as that program (the flunk-a-dunk) has ended, the real direction is put back on track.
The little picture is what happens on a day-to-day basis, but the big picture is what happens at the end of the year. We are all led to believe and think one thing, but the S&P has a way of doing the opposite and that is what we think the year end will be about also. Yes, the Fed is probably going to taper, but we don’t think that means the S&P is going to crash or go a lot lower — in fact, we think the opposite.
Our view: The Asian markets closed sharply lower and Europe is trading mostly higher. There are no economic releases this morning, but there are a few things we know. 1) Crude is breaking out on the upside and 2) the bonds and S&P have detached. 1635 is initial resistance in the S&P futures, but there are buy stops just above that level with initial support at the 1623-1625 level and key support around the 1610 level. On the upside we have 1638-1640 with major resistance coming in at the 1653 to 1658 level. Can the S&P keep going up? The first part of that answer is yes, but we also want to use tight stops. Our view is for a two-way trade: sell the midmorning rally and buy weakness. We also want to be on the lookout for the Pit Bull’s Thursday/Friday low the week before the July expiration.
As always, keep an eye on the 10-handle rule, and please use stops when trading futures, so you can live to trade another day.
- It’s 8:15 a.m. and the ESU is trading 1636.75, up 9.5 handles; crude is down 36 cents at 102.86; and the euro is up 13 pips at 1.2846.
- In Asia, 10 out of 11 markets closed lower (Shanghai Comp.-2.44%, Hang Seng -1.31%, Nikkei -1.4%).
- In Europe, 10 out of 12 markets are trading higher (DAX +2.38%, FTSE +0.29%).
- Today’s headline: “U.S. Stock Futures Advance Before Start of U.S. Earnings”
- Total volume: 1.71mil ESU and 4.7k SPU
- Economic calendar: No scheduled economic releases in the a.m. Consumer credit at 2 p.m. Tuesday: NFIB small business optimism index, Redbook and a 3-year note auction.
- Fair value: S&P +10.21, NASDAQ +17.73
- MrTopStep Closing Print Video: https://www.youtube.com/watch?v=FdijbVTF0BU