S&P 500 Futures: Wash, Rinse, Repeat

Last week the S&P was ‘up a day down a day’ during the expiration. So far this week it’s been groundhog day. While the algorithmic and high frequency trading may account for over 75% of the emini S&Ps volume, the programs also account for many of the daily patterns we see.

Yesterday the S&P 500 futures did exactly what they did on Monday. They gapped higher, rallied a little getting traders long looking for a breakout and trend day higher, and then proceeded to sell off late morning and midday. There was some sideways trade before rallying back higher, but ultimately failing just below the 8:30 cst cash opening range.

As the afternoon progressed I noted in the IMPRO forum that there was chatter amongst VIX futures and options traders on the floor. They felt there could be some type of risk off action going into the close. The MIM opened up and hovered around $300 million to sell for much of the final hour. In the final moments of trading the S&P dumped into the cash close, down to 2129.00, almost a 10 handle drop from the high of the hour.

At the end of the day the MiM spiked to over $500 million to sell and the official imbalance came out as $570 million to sell. Some portfolio managers wanted to remove some risk going into the Bank of Japan decision overnight and then the FOMC release today. All in all it was a much slower day, but the late sell off on the close was not a very good sign for the bulls.

Overnight equity markets got a boost after the Nikkei rallied on the Bank of Japan’s major policy announcement. The announcement was deemed unimpressive, but at the same time seemed to be more than most analyst expected. Asian markets rallied then the European equities bid higher as well. The S&P futures found a low of 2126.25 on the announcement then rallied up to 2144.00 just after the Euro open. Since then the ES has retraced back to 2138.00, and at 6:25 am cst is trading at 2141.00, up 10 handles on the session and 15 handles off the low. The ES is still 6 handles off the high on globex volume of 150K, which is still unimpressive.

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The price action last night was muted. Going into today’s regular session there may be some momentum on the open, but it’s likely that will taper off early as the markets will slow down and grind ahead of the FOMC. Of course, after the announcement, it’s anyone’s guess. MrTopStep is still looking at the 2160 price as the pivotal area to the upside, and now 2120 as the marker to the downside.

Interestingly, Barclays and BNP Paribas are the only banks that expect for the Fed to raise rates today, here are some of the other forecasts:

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Bank of America/ Merrill Lynch: While the FOMC is unlikely to deliver a rate hike, we think the committee will have to communicate that a hike is still likely before year-end. This means that the communication would have to sound cautiously hawkish, which is not an easy task. In our view, Fed Chair Yellen is likely to make the case for a hike before year-end in the press conference, but with an emphasis on the fact that it is dependent on continued improvement in the data.

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Barclays: The time has come The long-awaited September FOMC meeting has finally arrived, and we retain our out-of-consensus call for a rate hike on Wednesday. If the committee instead stays on hold, more hawkish members will need to be placated with stronger language that points to a December rate increase. We would expect limited USD potential downside if this is the case.

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In Asia, 8 out of 11 markets closed higher (Nikkei +1.91%), and in Europe 11 out of 11 markets are trading higher this morning (DAX +1.20%). Today’s economic calendar includes MBA Mortgage Applications, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, and the Fed Chair Press Conference.

Fed Head Fake On TAP

Our View: Mondays volume was over 1.5 million contracts traded, and yesterday’s total volume was 1.4 million. Our guess is that today’s volume will be much lower than average up until the Fed’s headlines hit the tape. If  750,000 ES trade before the decision, total volume will at least double in the final two hours. I have to admit that I have a sinking feeling. The Fed does not hike rates, the S&P rallies a little, then gets slammed. After Wednesday’s Fed meeting the markets will start to refocus on the weak stats and the end of the 3Q rebalance.

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

    • In Asia 8 out of 11 markets closed higher: Shanghai Comp +0.10%, Hang Seng +0.59%, Nikkei +1.91%
    • In Europe 11 out of 11 markets are trading higher: CAC +1.29%, DAX +1.20%, FTSE +0.42% at 6:00am ET
    • Fair Value: S&P -7.58, NASDAQ -6.56, Dow -90.90
    • Total Volume: 1.4mil ESZ and 6.4k SPZ traded

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