S&P 500 Futures: Firm Dollar, Lower Pending Home Sales, Weak BioTech’s, and Broad Based Institutional Selling

According to Investor Intelligence, bullish sentiment has been rising, and so has the stock market. To date, the DOW Jones futures (YMH17:CBT) are up 14% in 2016, the S&P 500 futures (ESH17:CME) is currently up 10.3%, and the Nasdaq 100 Futures (NQH17:CME) are up 7.25%. It’s been a rough and tumbling year, and the final two days may add to that.

$40 Billion Rebalance and T +3

While you are not going to hear this on CNBC, what happened yesterday was very clear to see. In the final trading days of the year, or what is called T+3, the big institutional players and pension funds are ‘taking some profits.’ These large accounts have probably been lightening up their positions for the last week, but it became very noticeable yesterday when the index futures markets started going down.

The problem these ‘big accounts’ faced yesterday was a total lack of liquidity. As the dollar continued to rise, the selling in the stock market became very broad based, with the Russell 2000 falling .90% and the Dow Jones Transports falling .55%. The selling was pervasive and it never let up. There were almost no bounces or short covering rallies, it was all straight down.

My own opinion is that the big institutional players didn’t think it out very well. With the Dow Jones up seven weeks in a row, they could have been selling for the last couple of weeks, but instead they wind up all trying to sell at once with ‘no bids.’

Volume Is Gone

As you can see by the chart below, volume shot up to 1 million contracts trading yesterday, and was the highest volume day over the last seven sessions. That may seem like a lot, but based on the 16 handle sell off, that would be considered ‘extremely’ low. On a normal, non- holiday week / trading day, a 20 handle drop in the S&P futures would end up with over 2 million contracts traded, if not more. If there was anything that was clear yesterday, it was the total lack of volume.

In terms of the overall trade, it was all one way. In terms of the markets overall tone, the overall price action was the weakest in a few months. As far as overall market participation, it was some of the lowest of the year. Bottom line, the public is on vacation and won’t be back until 2017.

Last Call For 2016

Yesterday opened at 2267.00 up 6.25 handles, and the opening print would be the high tick of the day. Sell programs took over quickly, pushing the ESH17 down to 2254.50, a 12.50 handle sell off in the first 45 minutes. From there the S&P failed to rally five handles, making a late morning high of 2258.25, before rolling over again and selling off down to 2246.50 mid day, and then grinding to a 2243.25 low in the last hour before settling the day at 2245.50.

Overnight equity markets in Asia were mostly mixed to higher, but the Nikkei was sharply lower, down -1.32%, and then Europe opened mixed but mostly lower. The S&P 500 futures have traded in a tight overnight range of five handles, printing the 2247.25 twice during the Asian session, and then sold off down to 2242.25 soon after the European open. The ES has last printed 2246.25, up four ticks on the session, with volume at 63k as of 6:28 am cst.

Asia and Europe

In Asia, 7 out of 11 markets closed higher (Nikkei -1.32%), and in Europe 8 out of 11 markets are trading lower this morning (DAX -0.24%). Today’s economic calendar includes Weekly Bill Settlement, International Trade in Goods, Jobless Claims, Bloomberg Consumer Comfort Index, EIA Natural Gas Report, EIA Petroleum Status Report, a 4-Week Bill Announcement, a 3-Month Bill Announcement, a 6-Month Bill Announcement, a 52-Week Bill Announcement, a 7-Yr Note Auction, Farm Prices, Fed Balance Sheet, and Money Supply.

Our View

I saw the early sell program in the ES, but after the ESH fell 12 handles, and I bought into it. Initially the futures rallied 2.5 handles my way, and then puked down to new lows and hit my sell stop. I knew the ES acted badly, but I still tried to buy it. I should have stuck to my guns and not traded, but the setup looked right, or at least it did after I bought them.

That said there are only 2 days left in 2016, and my gut tells me there could be more selling, but I am not going to be part of it. Up, down, all around, doesn’t matter to me. Our view, if there actually is a big rebalance to the sell side, the ES should go back down. The problem with this is there are not many two day declines. You can take it from there.

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

• In Asia 7 out of 11 markets closed higher: Shanghai Comp -0.20%, Hang Seng +0.17%, Nikkei -1.32%
• In Europe 8 out of 11 markets are trading lower: CAC -0.14%, DAX -0.24%, FTSE -0.06% at 6:00am ET
• Fair Value: S&P -4.61, NASDAQ -0.55, Dow -68.37
• Total Volume: 1.0m ESH and 4.3k SPH traded