It started out like a good day for the S&P 500 futures (ESU16:CME) before Janet Yellen spoke. After she began there was a quick sell off, the markets ended up not liking what she had to say. The S&P futures made an early high at 2186.75, that was the good part, the bad part was when the ES sold off 29.25 handles (points) down to 2157.50. In the end, the S&P fell right within the range of the 34 day study we did that showed that when the S&P falls, it averages 7 handles.
How We Got Here
On Friday, traders seemed to expect Janet Yellen to retain the dovish tone. The initial impact of her words suggested this and helped the S&P futures rally up to 2187.50, up 12 handles from its RTH open. However, as traders really digested her speech, what we learned from Ms. Yellen was that she indeed sees interest rates rising. Inevitability her speech appeared to do what must be done before any impending rate hike; begin to prepare the markets.
These remarks echoed other Fed members as of late and the financial markets reacted in kind. The S&P 500 futures reversed from the days gains to trade down to 2157.50. before rising 13 handles before the close and settling at 2168.75, down 6 handles. The 30 year treasury bond (ZBU6:CBT) traded lower closing near the low tick of the day. The Bonds made its lowest close since prior to the Brexit vote as traders see a near term interest rate hike. The U.S. dollar went bid as the index closed at a two week high with its best performing day since the Brexit reaction.
Overnight
Global equity markets were risk off Monday following the U.S. equity plunge on Friday. The ESU6 traded sideways for much of the Globex session before reacting typically to the European open, making a new low then pushing higher to make a new high. The time is 6:30 am cst and the benchmark future has traded in sub 5 handle range. The low came in at 2164.75, the high at 2169.50, and is currently trading one handle from the highs at Friday’s settlement. Overnight volume has been around 105k. The calendar today is very light. The task for bears is to create momentum after Friday’s trade. This task is difficult as the momentum has been for dip buyers and the potential that this week will have less participation being the last week of Summer, unofficially.
Bulls and Bears
Bears need to push below Friday’s low, which will be difficult. Likely the best case for sellers will be to keep a lid on gains today and attempt for late day weakness. This will keep the index in the lower part of Friday’s range into today’s close, then they may hope for follow through the rest of the week. Bulls need a quick rebound. The globex strength compared to other markets seems promising but at the very least, buyers need to target Fridays 2175 cash open area today and close above that level.
As with the bears, this is asking the bulls a lot to do today. For now, it looks like there may be some buy stops and momentum above 2170/ The path of less resistance seems higher, and below 2165 there could be sell stops and selling momentum with the easiest path lower. Remember, conviction gives way to pragmatism. Friday could be a game changer. We cannot expect to buy the dip just because it worked all summer. At the same time we cannot expect for sellers to follow through just because of Friday’s price action, otherwise they would have to break a quiet trend.
Fed Watch
In Asia, 10 out of 11 markets closed lower (Nikkei +2.30%), and in Europe 10 out of 12 markets are trading lower this morning (DAX -0.70%). This week’s economic calendar picks up significantly, there are a total of 23 eco reports, 7 t-bill or t-bond auctions or announcements, 5 federal reserve bank presidents speak and the August jobs report on Friday. Today’s economic calendar includes Personal Income and Outlays, Dallas Fed Mfg Survey, a 4-Week Bill Announcement, a 3-Month Bill Auction, and a 6-Month Bill Auction.
CME Fed Watch now shows that the probability of a September FOMC rate hike has risen to 33% from 21% following Friday’s address by Chair Yellen. The probability of a hike by the end of 2016 now stands at nearly 60%, up from 53%.
Down But Not Out
Our View: That’s right. The S&P closed down but by no means is it ‘out’. All the fed talk spooked the market, but today is a new day. While Mondays tend to be weak, I suspect that either today or tomorrow the ES starts going back up. We have a busy economic calendar, so there should be a lot of swings up and down. Our view is to sell the early rallies and buy weakness. If the ES does sell off it will create a better buying opportunity.
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 10 out of 11 markets closed lower: Shanghai Comp -0.01%, Hang Seng -0.38%, Nikkei +2.30%
- In Europe 10 out of 12 markets are trading lower: CAC -0.90%, DAX -0.70%, FTSE +0.31% at 6:00am ET
- Fair Value: S&P -1.78, NASDAQ +0.73, Dow -22.77
- Total Volume: 2.5mil ESU and 4.8k SPU traded
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