S&P 500 Futures: The Trump Rally and the Holidays

The Trump Rally and the Holidays

While many Americans are saying ‘ho-ho-ho’ to the Trump stock market rally,others are saying ‘hoax, hoax, hoax.’ This week ends with the November options expiration and the S&P 500 futures (ESZ16:CME) is only 6.25 handles (points) off its all time contract high.

While volume in the index futures markets has been running on the high end, it started tapering off this week. Below is the volume for the first three trading days last week, and the first three trading days of this week. You can clearly see the drop, and with Thanksgiving coming up next week, we think it’s possible volume drops again.

Volume in the S&P just prior to the election, and during the election week, was ‘heavy.’ Things started to slow last Friday, and despite Monday’s 1.8 million contracts, Tuesdays volume came in 350,000 contracts lower than the prior Tuesday. To top it off, yesterday’s volume was over 4 million contracts lower than last Wednesday.

‘Unknowns’ Taking Over

Now that the election is over things are starting to smooth out. I said over a month ago that I had a gut feeling something bad was going to happen. Even though the ESZ has sold off and rallied big, my street smarts say the S&P is going to continue to be ‘overly susceptible to headline news.’ The stock markets main focus right now is the new administration and higher interest rates.

Right now the markets are trading on the ‘unknowns,’ meaning we do not know what Trumps agenda is actually going to consist of. Will he actually implement a $550 billion infrastructure program? Will he repeal Dodd Frank? Will he break off long term trade deals? Will he kill ObamaCare? Will he put up a wall along the US Mexican border? Will he surround himself with smart, confident people, or is he looking for ‘yes men’? There are so many unknowns the list could go on forever, but at the end of the day, we all know the markets do not like uncertainty / unknowns, and my street smarts say there is a lot of that coming.

In the end, the ‘unknowns’ are going to make for some great trading, but the level of risk is going to go up. The best approach to the increased volatility is to maintain strict trading rules, and to know exactly what you are going to risk on the position before you buy or sell. The other part is to stick to the markets you know. There is a tendency for traders to ‘play the hot potatoes,’ like the Mexican peso. Don’t go there. Stick with the markets you are familiar with, maintain tighter risk, and lower the size of your positions.

There is not much to say about yesterday’s price action, the S&P printed 2170.75 on the 8:30 open, down 8.5 handles, and from there made an early high at 2176.25. A midday low was made at 2169.00, in what was a 7.25 handle range, which amounted to the quietest day since the 7.00 handle range on August 23rd.

While You Were Asleep

Overnight global stock markets in Asia and Europe were mostly higher, but very quiet. The S&P’s traded in a 7 handle range, and most of that move was in the first hour of the Tokyo session. The ESZ has been in a four handle range since 9:00 pm cst last night. The volume is low as expected. Today’s calendar is busy, but it’s unsure if that will be enough to give the index futures a boost in one direction or another.

In Asia, 7 out of 11 markets closed higher (Shanghai +0.11%), and in Europe 7 out of 11 markets are trading higher this morning (FTSE +0.27%). Today’s economic reports includes the Weekly Bill Settlement, Consumer Price Index, Housing Starts, Jobless Claims, Philadelphia Fed Business Outlook Survey, William Dudley Speaks, Bloomberg Consumer Comfort Index, Janet Yellen Speaks, E-Commerce Retail Sales, EIA Natural Gas Report, a 3-Month Bill Announcement, a 5-Yr Note Announcement, a 7-Yr Note Announcement, a 6-Month Bill Announcement, a 2-Yr FRN Note Announcement, a 2-Yr Note Announcement, Lael Brainard Speaks, a 10-Yr TIPS Auction, Charles Evans Speaks, Fed Balance Sheet, and Money Supply.

Our View: The election rally has been all about owning the small cap stocks. The Russell 2000 is up over 16% since Super Tuesdays limit down move in the S&P futures. Today’s calendar is busy, but most of the reports will be released before the opening bell. Bulls need to push and close back above 2180. From there they will set their targets on the 2185 contract high, then the 2191.50 all time high on a continuous chart, and then 2200. Bears need to push back below 2170, with big levels at 2164, 2158 and 2148. Our view is that there is more quiet trade to come over the next several sessions.

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

• In Asia 7 out of 11 markets are trading higher: Shanghai Comp +0.11%, Hang Seng -0.08%, Nikkei +0.01%
• In Europe 7 out of 11 markets are trading higher: CAC +0.20%, DAX -0.07%, FTSE +0.27% at 6:00am ET
• Fair Value: S&P -2.52, NASDAQ -1.26, Dow -34.69
• Total Volume: 1.3m ESZ and 5.3k SPZ traded