S&P 500 Futures ‘Shock and Awe’

on October 12, 2015

The rebound in energy is helping push commodities higher again with oil stocks leading the charge. Last week oil gained 9% and energy companies in the S&P were up a whopping 7.8% for the week. After a big leap in volatility over the last couple of months stocks had their best weekly gains in months. The Dow Jones future (YMZ15:CME) gained 3.5%.The S&P futures (ESZ15:CME) gained 3.3% for the week, their best monthly performances in since last December and February.

RISK ON / RISK OFF

Looks like it’s been a big game of risk ‘on / risk off‘ playing out in the S&P 500 futures. As of Friday’s close the S&P futures (ESZ15:CME) have been up 8 out of the last 9 trading sessions. It really has been a case of S&P Shock and Awe. At Fridays high to last week’s 1861 low the ESZ has rallied 151 handles, and 181 handles from the Aug 24th low. It was only a few weeks ago that the markets were heading toward the the lows and now the index futures are pressing above 2000.

Last 9 days of ESZ net changes and closes :

ESZ15:CME                     Settlement             Net Change

Monday        Sept. 281872.00-47.25

Tuesday       Sept. 291874.50+2.50

Wednesday Sept. 301908.75+33.75

Thursday       Oct. 11916.75+8.00

Friday            Oct. 21943.00+36.25

Monday          Oct. 51974.75+31.75

Tuesday         Oct. 61968.50-6.50

Wednesday    Oct. 71987.25+20.75

Thursday        Oct. 82006.50+19.25

Friday             Oct. 92007.50+1.00

Fed’s Nail in the Coffin

When the Federal Reserve took a pass on raising interest rates during the September meeting and the September non-farm payroll came in at 142,000 job created the PPT ( Plunge Protection Team) went back to work. Meaning that at least for now the fed can’t raise interest rates ,and zero borrowing cost will continue at least into the first quarter of 2016.

What we believe is that ‘smart money’ started selling at the end of March, or the first quarter. That selling continues for right into the end of the third quarter, but reversed during the September quarterly rebalance and there has been steady end of the day imbalance / MOC buying.

Following the big drop in prices of the last few months investors have been watching cautiously for signs that the weakness in multinational companies and those with commodity exposure and in the US has abated. Over the last two weeks it seems like the markets have gotten past the big selling, and ‘new buying’ has been showing up.

Most traders we talk to are very concerned about the third quarter earnings. After such a big decline in the S&P and lingering problems with the global economy, we understand this could be a rough earnings season but the fact that the markets have rallied so much in the beginning of the new quarter we think there could be some pull back but we also this the worst is now behind us.This week could be busy, there are a few important data points and big name earning scheduled to be released starting with retail sales and producer prices on Wednesday, consumer prices on Thursday, and industrial production on Friday. Also, earnings heats up, Intel, Johnson & Johnson, and J.P. Morgan report on Tuesday; Bank of America, Wells Fargo, and Netflix on Wednesday; Citigroup and Goldman Sachs on Thursday; and General Electric on Friday. MrTopStep understands there maybe some bumps in the road ahead but is sticking with his call that the S&P will trade above 2050 to 2100 by the middle to end of November and to start looking for pullback to buy some cheap S&P calls for the year end push back up.

In Asia, 9 out of 11 markets closed higher (Shanghai Composite +3.28%), and in Europe 7 out of 12 markets are trading lower this morning. Monday the banks are closed for Columbus Day Holiday, but Dennis Lockhart speaks, Charles Evans speaks, Lael Brainard speak from the fed. In total the week has 17 economic releases, 8 T-bill or T-bond Auctions or announcements and 5 Federal Reserve bank presidents speaking.

THIN TO WIN IS BACK

Our View: One of the things that sticks out the most about the sell off and rally, is how the volume went from 2mil to 2.5mil contracts a day, down to 1.37mil on Friday. Clearly the lower volumes have favored the upside…Thin to win is back.

Our view is that the stats show a bullish expiration week but the ESZ has already rallied sharply and ‘everyone’ thinks the S&P is going higher now. At some point there will be a pull back this week. As you know ‘ I’m bullish but I’m not foolish’ . Sell the early rallies and buy weakness.

The Monday before the October experation has been up 23 / down 8 of the last 31 (see study)