S&P 500 Futures, Russell 2000 Rebalance and MOC Buy $1.4 Billion

S&P 500 Futures, Russell 2000 Rebalance and MOC Buy $1.4 Billion

The S&P 500 Futures (ESU16:CME) failed early and often in the first five and a half hours. Like many of the ‘little sell-offs’ lately, the futures came flying back late in the day when the mutual funds started doing their late day buying. The ES rallied off the lows and then did a small retest of the 2160.00 area around 12:30 CT. After that it traded in a narrow range until around 1:00. A move higher started when the MiM (MrTopStep Imbalance Meter) started showing over $900 million to buy on the close. The late day buying was a combination of end of the moth buying mixed in with the Russell 2000 rebalance. After being down as much as -0.60%, the S&P closed off -0.24%.

While we understand all the chatter about Jackson Hole, and all the jobs talk, we don’t think that’s where most of the weakness is coming from. We cannot rule out that the two are not paying some role in the weakness, but we think most of the early weakness was due to crude oil (CLV6:NYM) trading all the way down to $44.51.

The S&P rallied over 10 handles off its late retest and crude oil futures only short covered .30 cents late. Crude was the early driver and the big moc buying was the late driver. As we have pointed out many times, the mutual funds tend to buy on the last 3 days and the first 3 days of the month, and they bought on each of the last trading days of August. Now we have to see what they do on the first 3 days of September.

European Outflows

Despite all of the ‘chop’ the S&P is going to go out basically flat. It closed out the first trading day at 2164.50, and settled yesterday at 2169.50. August was overall a slow month and we think that September will start out that way too. Money continues to flow into U.S. mutual funds and exchange traded ETF’s, but continues to flow out of European equity funds.

Europe has seen negative outflows every week for more than six months, the longest stretch since the previous record set during the financial crisis. Ryan Detrick from LPL Financial wote “As of yesterday the S&P futures have not moved more than 1% in either direction for 37 days. That is the longest run without a 1% move since the summer of 2014.” He continued to say “Going back 45 years, over the past seven weeks, the two longest streaks without an intraday move of more than 0.75% have taken place.”

August was a quiet month but don’t expect September to play out in the same way. September is one of the worst months of the year and tends to see some big swings in volatility. According to Bank of America Merrill Lynch, since 1928 the S&P has dropped 56% of the time in September.

I don’t think the markets start going down right now. Can the S&P pull back? Sure, but I don’t see any significant downturn coming in the first part of the month. And while some September Quad Witching won’t go so well, it’s the September quarter end rebalance, or the days leading up to it, that are on my radar. You can take it from there.

First Day of the Month

Overnight Asian markets were mostly weaker, but Europe opened with a decent bid. The ESU6 traded sideways until late in the Asian session and rallied from 2168.25 up to 2177.25 early in the Euro session. The ES is currently at 2173.25, up 3.75 handles on 140K volume, at 6:15 am cst. The market finds itself back where it was yesterday. The day before NFP can be slow, but this is also the first of the month trade. However, even if the S&P closes above or below some technical levels today, the true tell will be NFP reaction tomorrow.

In Asia, 8 out of 11 markets closed lower (Shanghai -0.72%), and in Europe 12 out of 12 markets are trading higher morning (DAX +0.49%). Today’s economic calendar includes Weekly Bill Settlement, Motor Vehicle Sales, Chain Store Sales, Challenger Job-Cut Report, Jobless Claims, Productivity and Costs, Gallup Good Jobs Rate, PMI Manufacturing Index, Bloomberg Consumer Comfort Index, ISM Mfg Index, Construction Spending, EIA Natural Gas Report,a 4-Week Bill Announcement, a 3-Month Bill Announcement, a 6-Month Bill Announcement, Loretta Mester Speaks, Fed Balance Sheet and Money Supply.

Our View

I should have stuck with the patterns and my normal daily call for yesterday; sell the early rallies and buy weakness. What I have been learning is that if I miss the short sale I need to time the buys closer to 12:30 or 1:00. That way if you catch it right, like yesterday, you just sit back and let the guys with the better seats do the heavy lifting. Our view? There is a heavy load of economic reports out this morning. Provided there are no major surprises, we lean to selling the early rallies and buying weakness.

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

Join Danny Riley for a FREE webinar featuring ‘The History of the Futures Markets’ Friday, September 9 at 10am CST.

• In Asia 8 out of 11 markets closed lower: Shanghai Comp -0.72%, Hang Seng +0.81%, Nikkei +0.23%
• In Europe 12 out of 12 markets are trading higher: CAC +1.00%, DAX +0.47%, FTSE +0/08% at 6:00am ET
• Fair Value: S&P -1.31, NASDAQ 0.48, Dow -9.00
• Total Volume: 1.8 mil ESU and 5.7k SPU traded

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