The three week rally in the S&P 500 futures looked like it was caving in on Thursday, but came charging back to life during Friday’s trade. All the speculation concerning the S&P’s ability to rally and hold has the bears running for cover. For as long as I can remember one of the biggest days of the week was what we called Mutual Fund Monday. The mutual funds would would use Monday as what we termed ‘their favorite day to put money to work’. That stopped several years ago, and then we picked up on something we coined the ‘late Friday rip’. Then that disappeared, but over the last two plus years, the weekly options expirations have made Friday the single busiest day of the week. This is not the same game our parents used to play.
S&P Rises for Fourth Consecutive Week
On two different MrTopStep videos last week I tried to explain what I was thinking and feeling. The first part was that the S&P had rebuked ES 2000, and the second part was that the futures (ESH16) were on the way to 2020. We can talk all we like about the ups and down, but at the end of the day the S&P futures have been ‘back and filling’, meaning that every time the futures sell off they stop going down, trade sideways and then rally. That price action started four weeks ago, it happened again when former Fed bank president Fisher spoke on Thursday, and that’s what happened on Friday, but this time the futures ran the stops exactly up to the levels I gave out and talked about.
The 50% rally in crude oil over the last month helped drive the global stock markets higher, and also helped push the US index markets not only to their fourth weekly gains, but to their longest winning streak in over four months. Traders are starting to see signs of improvement in the US economy. Friday’s rally nearly erased almost all of the losses the Dow Jones futures (YMM16:CME) and S&P futures (ESM16:CME) saw in the first two months of the year and brought them back to within 26 points, or 2.25%, of 2016 rough start. The rally has clearly pushed back the talk of a recession. On Friday’s close the Dow Jones Futures (YMM16:CME) closed 294 points, or 1.1% higher, down 1.2% year to date. The ESM16 closed up 31 points, or +1.6%, to their highest close since December 31, and down 1.1% in 2016; that’s back from being down as much as -10%. We could talk about all the net changes and how the S&P has shaken off the bearishness of the last two plus months but I prefer to look forward than look back. This week is going to be a proving ground not just for the S&P but the global markets as a whole.
Mid-Month Rebalance
Monday and Tuesday start out the month with the mid-month rebalance. While not a lot of traders talk about it, the mutual funds tend to buy stocks, or mark up stocks at mid-month. This usually takes place on the 14th of each month. The cash stats for Monday are strong with the first day of March expiration having closed higher in 22 of the last 31 years. We believe that given the recent strength in equities that funds will continue to mark stocks higher in this month’s rebalance.
BOJ
The Bank of Japan meets on Tuesday March 15th when the statement on monetary policy will be announced. Based on last week’s big central bank meetings, the ECB has laid the framework for the BOJ to up the ante for Japanese policymakers to come with larger response, perhaps expanding the size and composition of their QE program. I don’t pretend to know how to connect all the dots, but it seems unlikely Japan will not come back with some type of expanded QE program, and that brings us to the US Federal Reserve’s two day meeting. Tuesday’s S&P March Expiration cash stats are the weakest day of the week, having closed lower 16 of the last 31 years, or basically drawing near even.
Two Day Fed Meeting
On Tuesday and Wednesday the US Federal Reserve is going to make its next interest rate hike decision. While the fed is widely expected to put off the next interest rate hike this week the recent uptick in US data has put a possible hike back on the table. We are going to keep it simple, according the Fed Funds futures on the CME, there is a 47% likelihood of a rate increase from the Fed at its June policy meeting. The odds for a rate increase at the December meeting were 77% recently. Earlier in February, the odds for both meetings were zero. However, when looking back to last year during the August equity sell off, the December Fed Fund Rate futures showed only a small possibility of a hike by years end, but buying momentum can often change the scenery and as equities continue to rise, it will only increase the probabilities of a rate hike. Wednesday’s expiration stats are only mildly firm having closed higher in 17 of the last 31 years.
My World and My View
As we all know I continued to talk about looking for the PitBull’s Thursday Friday low the week before the expiration early last week. With the help of former Federal Reserve Bank President Richard Fisher’s comments that the Fed “injected cocaine and heroin” into the economy during the credit crisis, the low not only came on time, but there was never any kind of retest. After the -1,100 tick at the 1967.25 low, and the buy programs showing up just before the MiM started showing an increasing buy imbalance, I knew the gig was up. I pointed both of them out and said to expect higher prices. In fact on Wednesday I came out saying when the ESH16 was trading 1980 that the ‘next 50 handles was up’, everything was starting to lay out. The short sellers showed back up right into the PitBull’s Thursday Friday low, and on Friday they made the bears pay.
March Quadruple Witching
Here we go… According to the Stock Trader’s Almanac the Monday before the March Quad Witch has been up 21 of the last 28 occasions. Then you have ‘bullish’ clusters on Wednesday, in comes at St Patrick’s Day on Thursday, and then the stats show the Friday of the Quad Witch mixed over the last 28 years, but down 5 of the last 7.
Download all of the March Expiration stats here
In Asia, 11 out of 11 markets closed higher (Shanghai Comp +1.75%), and In Europe 11 out of 12 markets are trading higher this morning (DAX +1.54% ). This week’s economic calendar features the 2-day FOMC meeting & press conference, 24 economic releases, a total of 7 T-bill or T-bond Auctions or Announcements and 2 Fed speakers.. Today’s economic calendar includes a 4-Week Bill Announcement, 3-Month Bill Auction and 6-Month Bill Auction.
We Are Not Here To Fight City Hall
Our View: There could be a barn burning rally this week. Monday and Tuesday are the mid month rebalance, the BOJ is set to expand its quantitative easing programs, Tuesday and Wednesday is the Fed’s two day meeting, and Friday is the March Quad Witch. If you wanted slow, I’m sorry, but that’s not going to happen this week. Please pay attention to the S&P cash study for the March expiration. I think it’s going to be important this week. Right now all the selling is being absorbed. One of the things I have learned about day trading is that while it’s important to have a forward looking view it’s also important to go with the flow. Time and time again traders think they know more than the markets, and the way I see it is, we are NOT here to fight city hall, if the ES is going up we want to go for the ride not fight it. It’s ok to buy the ES and take 5 or 6 handles out of a winning trade and see it go 10 or 15 higher. Remember, trades are like busses, if you miss one a new one will come along soon.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 11 out of 11 markets closed higher: Shanghai Comp +1.74%, Hang Seng +1.17%, Nikkei +1.74%
- In Europe 11 out of 12 markets are trading higher: CAC +0.62%, DAX +1.54%, FTSE +0.49% at 5:30am CT
- Fair Value: S&P -9.23, NASDAQ -10.03, Dow -97.55
- Total Volume: 1.2mil ESM, 1.8mil ESM, 18.5k SPH and 11.7k SPM traded
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