The new year was supposed to be about a ‘new beginning’ and ‘looking forward’, but the last 8 trading days that ended 2015 and began 2016 have been anything but. The S&P 500 futures that started at 2075 on December 30th sold off down to 1892.50 yesterday. That is a 182.50 handle (point) decline, or a loss of -9%, placing the S&P 500 back in correction territory from its 2015 high of 2135.
Many traders are starting to use the word ‘crash’, and making comparisons to the DOW’s 1,100 point drop on August 24, but we think the problems are deeper than that. The continued selling in the oil market, some leading stocks like APPLE falling apart has most traders scrambling. Day trading futures and holding stocks are two completely different types of investing. With the S&P up over 220% in the last 6 years it may be time to take a step back and consider how much the markets have sold off this year compared to how much they have rallied. While we all see the weakness in stocks, the last time crude oil was trading $31.00 the ES was trading around the 1100.00 level, that was in December of 2003.00. So how bad is it? Right now it is clearly a sell rallies market, but with traders shifting to the earnings, the S&P short term oversold, and going into the January options expiration week we think there could be a bounce higher today and throughout the week.
What is an appropriate correction after a 220% rally? While our yearly range prediction was 1700.00 to 2250.00 we think there is an outside chance the ES could trade all the way down to 1580. The big numbers that stick out to us on the downside are the September re-test low of 1861, then the August low of 1831, below there is the October 2014 low of 1813, and the 2014 low of 1732. These downside levels are just initial areas of interest if the equity indexes correction mode goes into bear market mode. The 1732 low from 2014 would place the S&P futures down nearly 20% from its 2015 high.
Fed Speak
This week has a high level of fed speak. Federal Reserve Vice Chair Stanley Fischer’s speech on monetary policy and the zero bound, at Banque de France conference in Paris and Richmond Federal Reserve Bank President Jeffrey Lacker speaks on the economic outlook, in Columbia, South Carolina today. On Wednesday Boston Federal Reserve Bank President Eric Rosengren speaks on the economic outlook, in Boston and St Louis Federal Reserve Bank President James Bullard speaks on the economy and monetary policy, in Memphis, Tennessee on Thursday. Friday New York Federal Reserve Bank President William Dudley speech to Economic Leadership Forum in Somerset, New Jersey and Dallas Federal Reserve Bank President Rob Kaplan conversation in Dallas on Friday. With all this fed speak there is sure to be headlines about the feds path to push rates higher. Based on the recent downturn, the Chinese economy falling apart and the S&P down almost 10% in the first six trading days of the year we get the feeling that the fed is about to lower its tone and its projections.
Last week, San Francisco’s Fed President John Williams made a noticeable admission when he stated that “The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy”. This backtracking or mere recognition of the facts leaves one to wonder where else the Fed will have to admit guilt after they raised rates for the first time in nine years. At the same time the economy heads for potentially troubled waters this year. The Fed has been known to raise rates at economic tops before, it’s telling that the last time rates were raised was in the months preceding the beginning of the fallout from the credit crisis.
In Asia, 8 out of 11 markets closed lower (Shanghai Comp +0.20%), and in Europe 10 out of 12 markets are trading higher (DAX +2.08%). Today’s economic calendar includes NFIB Small Business Optimism Index, Redbook, JOLTS, 4-Week Bill Auction, 3-Yr Note Auction, and Jeffrey Lacker Speaks.
In Asia, 8 out of 11 markets closed lower (Shanghai Comp +0.20%), and in Europe 10 out of 12 markets are trading higher (DAX +2.08%). Today’s economic calendar includes NFIB Small Business Optimism Index, Redbook, JOLTS, 4-Week Bill Auction, 3-Yr Note Auction, and Jeffrey Lacker Speaks.
Our View: You can talk all you want about the downside but this week may not be that weak. If you are an old school investor you should have your stock list ready to go. Like the OP says above there is a ton of Fed speak out this week and it’s going to be interesting to see if the Fed becomes less hawkish and borderline dovish. It’s my guess some of the Fed headlines show they are notin a hurry to continue to jack rates right away. I also think the ES is oversold and ready for a pop. We lean to buying weakness.
Download all of the January expiration stats here
‘The S&P 500; China and Oil Below $31’
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 8 out of 11 markets closed higher: Shanghai Comp -+0.20%, Hang Seng -0.99%, Nikkei -2.71%
- In Europe 10 of 12 markets are trading higher: CAC +2.01%, DAX +2.08%, FTSE +1.49% at 6:30am CT
- Fair Value: S&P -7.83, NASDAQ -9.12, Dow -93.88
- Total Volume: 2.7mil ESH and 28k SPH
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