As September was closing and October was approaching, I began to mention the historical volatility surrounding “spooky” October, and that I expected to see some sort of retest of the August 24th lows. Well the S&P futures came within 30 handles of that retest, but what was less emphasized at the time is how the cash index SPX actually did retest the area from the panic lows of August, and bounced from that area as the equity indexes maintained a solid and persistent bid in early October. And while I spoke of the historic volatility I always kept referencing the fact that October is known as the “bear killer”.
22 Trading Days In October
October has a total of 22 trading days this year. From there we can divide the month into the thirds, with the first and last third having 7 trading days, while the middle third is left with 8 trading days. The first third of the month was full of buying as the ESZ closed higher 6 of those 7 days and traded 100 handles higher. The only down day closed lower by just 6.25 handles, as the entire first 7 days of the month only presented three 10 handle pullbacks during the cash session, and closed the first third out at 2007.50.
The middle third of the month finished yesterday having just over 50 handles of range, and closing at 2008.50, up just a single handle over the last 8 days, while closing higher only 4 of the 8 sessions. During this middle third only one time did price trade 10 handles above a prior days close as upside was limited, and for the last 5 days in a row the high of the prior day was taken out with no real extension of the previous days range, no one wanted to hold long. We often refer to this middle third as the mid month rebalance, as funds seeks to balance out their holdings from either too long or too short. While the futures have seen some profit taking there hasn’t been enough of a trade during this mid month to suggest very many conclusions as volume has now crept back under 1.5 million as the norm.
Last 7 Days of October
Today begins the last third of the month. I will say this much, we keep hearing about an overbought market, but this seasonal trade is extremely difficult to short and spots have to be picked extra carefully.
Last year after the October low was made, there were 35 sessions from mid October to the December pullback. 23 of those 35 sessions closed higher, while only three times did a two day pullback occur. Perhaps most intriguing is the fact that only 1 of those 35 sessions traded lower by 10 handles or more. The ride between now and years end, while it may seem overdone on the long side, can continue with the lower volume grind higher.
However, every year is different, and when considering the historic calendar it suggests that today begins the most bearish 4 days of the month. Also, today Caterpillar (CAT) will report earnings after yesterday releasing Q3 sales report which showed moderate global decline. CAT has often been seen as an economic indicator in the U.S., and how long the S&P can continue to hold its head above water and ignore the multiple earnings disappointments is anyone’s guess. This much we know, there has been a solid amount of short covering and new money buying in October, and the question is, as the month concludes it’s final third beginning today, do they take some profit going into month’s end and then buy it back in November? Statistically speaking, 9 of the last 10 months ending was lower than the close of expiration week (which was last week), and the lone exception was higher by about 5 handles. I still maintain my call that the S&P futures will be at 2150-2200 by years end, but with the rally beginning to stall into month’s end, there could be some profit taking before re-loading in November. To the downside the 2000 price and the 1985-1990 area are points of interest for support.
In Asia, 7 out of 11 markets closed lower (Shanghai Composite +1.45%), and in Europe 9 out of 12 markets are trading higher this morning (DAX +0.44%). Today’s economic calendar includes Jobless Claims, Chicago Fed National Activity Index, FHFA House Price Index, Existing Home Sales, Leading Indicators, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, 2, 5, 7 Yr- Note Announcement, 30 Yr-TIPS Announcement, Fed Balance Sheet and Money Supply.
Our View: The ESZ15 finally gave up to the downside. Early on I could see the premium levels between the S&P cash (^GSPC:SNP ) and the S&P futures (ESZ15:CME) that make up S&P 500 index arbitrage buy and sell programs slip, indicating the S&P was setting up for sell programs. After a small early uptick the ES lost momentum and started moving lower, taking out the downside sell stops. The other part which was really noticeable was the lack of bids on the dips and the reappearance of big offers on the short covering rallies. So much so that I put this out early in the day:
09:55:34 TRADINGDATA2: (driley) I don’t know.. this has a different feel to it
09:55:48 TRADINGDATA2: (driley) there are so many sell stops below
10:24:35 TRADINGDATA2: (driley) es acts weak
10:24:54 TRADINGDATA2: (driley) overall price action is changing
12:11:46 TRADINGDATA2: (driley) Got the bounce and if I could categorize the up tick I would say it’s been filled with sells.
01:13:16 TRADINGDATA2: (driley) splish splash the ES is gonna take a bath
This is the type of stuff that I did for all the big banks and hedge funds at our desk in the S&P’s. I was good at what I call reading the ‘futures tape’ And that’s exactly what I delivered to the MrTopStep forum and my over 40,000 followers on StockTwits and Twitter yesterday. Our view is the there is more room and more sell stops to run on the downside. Sell the rallies, the next 4 trading days are statistically negative.
It’s not the spooky month of October, it’s the ‘Bear Killer
We have a Free webinar coming up next week, sign up early so you dont miss it!
- In Asia 7 out of 11 markets closed lower : Shanghai Comp. +1.45%, Hang Seng -0.63%, Nikkei -0.64%
- In Europe 9 out of 12 markets are trading higher : CAC +1.32%, DAX +1.35%, FTSE -0.06% at 6:30 am CT
- Fair Value: S&P -7.37, NASDAQ -11.03 , Dow -88.22
- Total Volume: 1.78mil ESZ and 4.9k SPZ
[s_static_display]
No responses yet