If I wrote about the S&P like everyone else does, you would not read it, and I would have gotten bored of myself years ago. As the markets evolve certain things have become clear. The first is that when the S&P futures (ESU15:CME) sell off, it does so on oversized volumes, and when it starts to go up, the volume slips. In the past week the volume in the S&P futures went from doing 2.5 million contracts in one day, to doing 1 million a day on Monday, and 1 million contracts yesterday, while at the same time the CBOE’s fear gauge fell from 14.50 down to 13.14.
There is little doubt that fear drives markets. Perfect examples of this would be the recent selloffs caused by Greece and China. In both cases the overall price action of the S&P turned more negative as the headline news algos helped to exaggerate the drop. As the news got worse the level of selling increased, and when the news finally shifted the other way, the news algos started searching for the upside stops. We have seen this price action consistently for several years and all it does is add buy stops above in the S&P, Nasdaq and Dow futures that end up helping push the futures backup. That is what we saw yesterday.
While China remains a big concern, in less than one month the Federal Reserve will be preparing to raise US interest rates during its September 16th and 17th meeting. If you look at the Fed minutes from the last meeting you will find that not every remark from the last meeting makes it into the record. According to Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington who helped edit minutes for almost two years as a Fed economist. “You’re less likely to misconstrue something if you do.” According to a Bloomberg survey of the minutes released this week, 77% of forecasters believe the Fed Open Market Committee will use its meeting on Sept. 16-17 to raise interest rates. This meeting falls right in the middle of the September Quad Witching, and while interest rates will be a key driver of the markets, the timing of the meeting also coincides with with some historically volatile period for stocks. There is clearly a lot of concern building up about the timing.
That said the US stock market and global markets have been clearly warned about the fed intentions, and while it may not play out well for the S&P during that period, I think that the markets firm back up and start moving higher again. But that is 23 trading days away, and right now the ESU15 is closing in on the S&P 2100.00, and all the buy stops that are sitting above that level. Last night the ESU15 traded up to 2104.40 and is trading 2094.00 this morning. Today’s S&P cash study show the S&P cash as being up 16 / down 15 of the last 31 occasions . After yesterday big push up and weaker stats for today, we think the markets could be due for some type of back and fill price action before heading higher into the buy stops that go from 2098 all the way upto 2118. Only time will tell…
CHINA SHARES PLUNGE -6.2% DESPITE PBOC’s BIG CASH INJECTION
In Asia, 10 out of 11 markets closed lower (Shanghai Comp. -6.15%), and in Europe 10 out 12 of markets are trading modestly lower (DAX -0.15% ). This week has a very small economic and earnings calendar. Today’s economic schedule starts with Housing Starts, Redbook, and earnings from HD, WMT, TJX, DKS, LZB, ADI, TSL, CSIQ, SINA, CMCM, WB, DL, EROS, and HAIN.
Our View: Who is giving who more of a heartache, the bulls or the bears? Right now it’s the bulls giving the bears the heartache, and I think there is more of that coming this week. It’s the August expiration week, volume is dropping significantly, there is a light economic and earnings calendar this week, positive stats, and nothing but buy stops above 2100.00 all the way to to 2120.00. Our view is the ES has rallied over 20 handles from yesterday’s, low and today’s stats are the weakest of the week. I think we could see higher prices. I am just not sure the rally will hold into tomorrow. Last week’s high was 2100.50 and the two week high comes in at 2106.70. It’s highly likely we run the buy stops through that level today.
S&P Cash Study for the August Options Expiration
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In Asia 10 out of 11 markets closed lower: Shanghai Comp. -6.15%, Hang Seng -1.43%, Nikkei -0.32%
- In Europe out 10 of 12 markets are trading lower : CAC -0.27%, DAX -0.15%, FTSE-0.43%, MICEX -1.04%, at 5:30 am CT
- Fair Value: S&P -3.61 , NASDAQ -2.25 , Dow -40.00 .
- Total Volume: 1.2mil ESU and 3k SPU traded
- Economic calendar: Housing Starts and Redbook
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