There were several data points yesterday, from the MBA Mortgage Applications to CPI, and from Retail Sales to the crude oil inventories. As much noise as the economic numbers made, the day’s trade was overshadowed by the latest move from the U.S. Federal Reserve. It’s not a question of whether the Fed wants to raise interest rates, it’s whether they will speed up the size and number of hikes. With the economy continuing to improve and the Fed behind the eight ball, it’s our feeling that when the headlines hit it won’t be the 1/4 point interest rate hike that traders are looking at, its whats on the Fed’s interest rate increase agenda.
‘Thin To Win’ Meets The Fed
Business inventories and the HAHB Housing market index both came in higher than expected. The latest economic reports are all part of an ever improving economy, but the big question is, will there be 3 rate hikes this year or 4? Not much has changed, the ESM sold off a few times under the VWAP, and every time it has has come back to make a higher high, to me that’s bullish. So what’s going to be the impact of increasing the frequency of the rate hikes? Well, the Fed just said only three hikes in 2017, but I still think there will be four hikes, especially if the positive economic trend continues.
The Yellen Buy Program
The futures ended up pushing to 2387.75 late in the session,13.25 handles from the all time high, up 17.25 handles from the initial low after Yellen, and up 25 handles from Tuesday’s close. The S&P’s did reverse lower in the final minutes of the session, settling at 2380.50, and then continued lower after the cash close down to 2377.75, before the contract close at 4:00 pm cst.
Yesterday was another case of it taking days and weeks to knock the S&P lower, and then only one to bring it back up. A combination of a trading public that want’s to short this rally, and algos that want to bid up any news, results in buy stops being pushed higher until there are enough longs to then run sell stops into the close. If you keep trying to short it you will likely continue to get run over. This market is known for it’s comebacks, and it found support in the middle of a 40-50 handle retracement.
While You Were Sleeping
Overnight, global stocks markets saw a rise following Wall Street’s post Fed rally. All markets in Asia closed higher, and this morning all major European markets are tracking higher. The S&P 500 futures opened globex at 2379.25, made a low of 2378.25, and then rallied during the night, pushing up to 2388.75 early in the Euro session. As of 6:12 am cst the last print is 2386.50, up 6 handles on the session, with volume at 137k.
In Asia, 11 out of 11 markets closed higher (Shanghai +0.84%), and in Europe 10 out of 11 markets are trading higher this morning (DAX +1.00%). Today’s economic calendar includes the Weekly Bill Settlement, Housing Starts, Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index, JOLTS, EIA Natural Gas Report, a 3-Month Bill Announcement, a 6-Month Bill Announcement, a 10-Yr TIPS Announcement, Fed Balance Sheet, and Money Supply.
Our View
Our trading rule that it takes days and weeks to knock the S&P down, and only one to bring it back, was right on. I think trading is a big game of patterns. The main one is how traders come up with any excuse they can find for selling into an ‘event’. Traders talk the S&P down, then in comes a series of higher lows, some ‘back and fill’ price action, and finally the rip higher.
In 24 hours the S&P rallied 33 handle from Tuesday’s low to yesterday’s late day high, that is more than half of the entire decline from the 2401 high to the 2351 low. I know this sounds funny, but you almost have to pinch yourself when you see this stuff because it happens so often, it’s almost crazy. While the S&P cash study for today shows the S&P up 24 / down 8 of the last 32 occasion, there is also another stat that says the day after a two day fed meeting is down.
To tell the truth I am not sure what to think. One side of me says the ES has rallied far enough, but the other says the S&P will gravitate to where the largest open interest is, and that’s between 2375 and 2400. It truly is a lesson learned.
Our view remains the same; you can sell the ES around the European close and buy weakness, or you can just stick with the trend and buy weakness.
Download all of the March expiration stats here
The S&P 500 Futures and The Feds Interest Rate Increases
- In Asia 11 out of 11 markets closed higher: Shanghai Comp +0.84%, Hang Seng +2.08%, Nikkei +0.07%
- In Europe 10 out of 11 markets are trading higher: CAC +0.84% DAX +1.00%, FTSE +0.92% at 6:00am ET
- Fair Value: S&P -2.98, NASDAQ +4.43, Dow -46.69
- Total Volume: 621k ESH, 1.7mil ESM, 9.3k SPH, 7.6k SPM traded
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