S&P 500 Futures, Fed Confusion and a 2.5% Drop

S&P 500 Futures, Fed Confusion and a 2.5% Drop

The markets have moved into a historically ‘turbulent’ period. The September quadruple options expiration, the end of the third quarter rebalance, and aiming toward the very spooky month of October.

When the VIX trades below the $12 handle, and the S&P hasn’t made a 1% move in either direction in 43 sessions, we all know that can’t last forever. When you throw the incompetence of the US Federal Reserve, and the S&P futures (ESZ16:CME) trading at all-time highs, something has to give, and it did yesterday. Threats of a September rate hike, bad apple reviews, crude oil that was up almost 5% in the previous two sessions down 3.56%. The VIX, that closed at $12.51 on Thursday, traded all the way up to $17.54 Friday before closing at $17.50, up $4.99 or 40%

The late weakness continued into the close with the Dow Jones futures falling over 400 points, or down -2.33%. The S&P 500 futures (ESZ16:CME) traded all the way down to 2113.25, or down 2.60%. The Nasdaq 100 futures closed down a whopping 124.75 points, or -2.64%, down to 4794.00.

Further Lows?

At the end of the day, the technical damage to the S&P 500 futures was undeniable. The front month future, on a continuous chart, took out all of the August range in a single day. This made for the lowest close since July 7th.

We mentioned for weeks how the S&P was up during the Euro session and net lower from the cash session open to close. This built a house of cards for the spoos that would be shaken as desk managers began to return post Labor Day and rebalance at the end of the week. In cases like this, the probabilities usually suggest further lows. Given the seasonality, the path of less resistance looks lower at this point.

Overnight global equity markets followed U.S. equities from Friday and traded risk off. Every major index around the world was more than 1% lower and the ESZ6 continued to look weak. The benchmark index futures held a tight range for the first few hours of globex, but went offered a couple hours into the Tokyo session. The ES traded from its session high of 2115.50 down to 2100.25 quickly, and could only bounce back to 2108.50 early in the Euro session. Currently, the futures are trading at 2102.50, down 13.50 handles on the session, with globex volume at 381K as of 6:30 am cst.

September Quad Witch

Today’s calendar is light, but this week does feature the September expiration, as well as the mid month rebalancing. The Fed’s Kashkari speaks today. It will be interesting, given Friday’s decline, as an equity dump will not make it easy on the Fed to raise rates at all, and certainly not this month. Technical levels are the 2070-2095 area, which should offer some support, followed by 2040 and then the 1980 area low from post Brexit. It’s very difficult to call bottoms when this markets start to slip and slide lower, so MrTopStep is more interested in pointing out levels of interest that the S&P has to consider before each leg lower.

Download all of the September quad witch expiration stats here.

In Asia, 11 out of 11 markets closed lower (Shanghai Comp -1.85%), and in Europe 11 out of 11 markets are trading lower this morning (DAX -2.00%). This week’s economic calendar features the September QuadWitching, 22 economic reports, 3 Fed Reserve speakers, and 16 U.S. Treasury bond/note/bill events. Today’s economic calendar includes Dennis Lockhart Speaks, a 4-Week Bill Announcement, a 3-Month Bill Auction, a 6-Month Bill Auction, a Neel Kashkari Speaks, a 3-Yr Note Auction, and a 10-Yr Note Auction.

Our View: Three Fed speakers trying to sugar coat the equity sell off should be entertaining. We have been concerned about the quiet markets of late, and today will be anything but quiet. Remember, sharp declines often lead to violent buy stop rallies, even if they are short lived “dead cat” bounces, so keep your wits about you. Trade from both sides and never fall in love with your positions. MrTopStep’s call is to sell the early strength and buy the late weakness while keeping tight stops, and never negotiate when on the losing side of the market.

As always, please use protective buy and sell stops when trading futures and options.

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• In Asia 11 out of 11 markets closed lower: Shanghai Comp -1.85%, Hang Seng -3.36%, Nikkei -1.73%
• In Europe 11 out of 11 markets are trading lower: CAC -1.94%, DAX -2.00%, FTSE -1.57% at 6:00am ET
• Fair Value (Dec): S&P -7.89, NASDAQ -5.91, Dow 89.74
• Total Volume: 2.1 mil ESU and 22k ESU and mil 2.8 mil ESZ and 15k SPZ traded

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