After a small pull back overnight, and another small sell off after the 8:30 open, the S&P 500 futures did exactly what they do best lately, they ‘back and filled’ below the vwap and then started moving higher again. At the end of the day we could do all the ups and downs and twist and turns, but the bottom line is, it was a very quiet day and clearly the lower volumes worked in favor of the upside.
How high can the S&P go? The answer to that question depends on who you are listening too. In the beginning of the year, and into February, the S&P was falling off a cliff. There was no good news, and everyone sold into it, then over a three week period the S&P reverses almost 10%. Did all the negatives that helped push the markets lower disappear, or has the S&P started taking bad news and making good of it? What we do know is that the S&P 500 futures (ESM16:CME) double bottomed on Feb 11th at the 1804 level and have rallied over 210 handles. While many are still discounting the overall price action, the shorts have been hit especially hard, and the lack of pull backs have not offered much of an escape.
Seasonals Matter
As futures traders, we are geared to get our read from the ups and downs of the markets, and how the charts look. While most day traders have a short term horizon we still think it’s important to have a longer looking view. Like the best six months for stocks from November to April, or just looking ahead to the next week like we started doing early last week. While the Santa Claus rally really never came, and weakness abound in the beginning of the year, that doesn’t mean all the stats are not good. In fact, sometimes, the historical stats work best when the markets catch everyone off base. That is what I believe has been helping drive the markets higher as the S&P moved into March.
There is no doubt 2016 has been confusing. The big spike in the VIX and sharp drop in stocks clearly scared investors. The problem we see with the rally isn’t so much that the S&P can’t go higher, it’s the low volume buying that’s concerning. Yesterday, Morgan Stanley slashed forecasts for all major equity markets and advised investors to sell stocks that have recently rallied. While they still see upside for the year the optimism is waning as the bank suggests that there is no motivating factor to continue the equity rise. Morgan Stanley’s economists are also slashing anticipated economic growth, stating that their models suggest a 30% chance of recession this year. They commented that, “Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities,” and also that “The probability of a global recession has risen.”
Read the full Morgan Stanley at MarketWatch.com
It was only last week that the news was saying the current rally in the stock market has pushed back the recession fears. As I have said many times, I didn’t go to college, but I do not think you need a degree of higher learning to understand what’s going on. The global economies are shrinking, banks are downsizing, and the market leading stocks, despite the rally, have not gone up as much as the broader market has. As a bull market trader I look at short term patterns and right now I see nothing in the way of stopping the S&P futures from trading up to the 2040-2060 level. There could be some selling when the BOJ makes its announcement but I don’t think the rally is over yet. I admit it’s a hard rally to like, but it’s an even harder rally to fight, and this battle may keep going right into Friday’s March Quad Witching.
As traders, we live in the here and now, and right now the S&P is still signaling higher prices. Can the S&P make a high and sell off again? I am sure it will, I just do not think that happens this week. I do think it will start next week and into the end of the quarter rebalance. Until then traders always remember… the trend if your friend.
In Asia, 9 out of 11 markets closed lower (Shanghai Comp +0.17%), and In Europe 10 out of 12 markets are trading lower this morning (DAX -0.50% ). Today’s economic calendar includes a 3-Yr Note Settlement, 10-Yr Note Settlement, 30-Yr Bond Settlement, FOMC Meeting Begins, PPI-FD, Retail Sales, Empire State Mfg Survey, Redbook, Business Inventories, Housing Market Index, 4-Week Bill Auction, and Treasury International Capital.
Our View: That was a strange trade yesterday. It was not that long ago that a bad Friday meant a bad Monday, but somehow Mondays have become the slowest day of the week. Today starts day one of the fed’s two day meeting. While I can’t rule out some type of pull back, I am going to again be looking at the three parts to the day, and what the cash buyers have in store later in the day. Until then our view is to sell the early rallies and buy weakness keeping in mind how many buy stops we have run that last few days.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 out of 11 markets closed lower: Shanghai Comp +0.17%, Hang Seng -0.72%, Nikkei -0.68%
- In Europe 10 out of 12 markets are trading lower: CAC -0.91%, DAX -0.50%, FTSE -0.60% at 5:30am CT
- Fair Value: S&P -9.51, NASDAQ -10.68, Dow -100.23
- Total Volume: 880K ESH, 1.65mil ESM, 22k SPH and 21k SPM traded
[s_static_display]
No responses yet