ES 03-15 (5 Min)  1_29_2015

The S&P 500 futures (ESH15:CME) continued its
“shake & bake” price action yesterday with the E-mini S&P futures trading all the way up to 2046.50 in Globex after Apple reported better than expected earnings. It then sold off to 2011.00 at 1:30 CT and then all the way down to 1991.50 on the 3:15 futures close.

The drop was relentless, with just the slightest hesitations at two support trendlines on Vikram’s chart at 2008.50 and 1997.75. The drop ended precisely at a line connecting the October 2013 low and the 1970.25 low of Jan. 13, 2014. Precisely— still think drawing trendlines is a waste of time? (This is Vikram writing the first half today, but Danny agrees.)

It was a 38.5-point drop. The Dow (^DJI:DJI) sank 1.1 percent on Wednesday and 2.8 percent during the two-day FOMC meeting, its biggest two-day drop in a year. The NASDAQ futures (NQH15) closed down 53.20 at 4124.30.

Earnings are obviously a big influence on current price action. While Apple posted record earnings, Exxon Mobil and Chevron dropped more than 3 percent as oil neared a six-year low. The strong dollar is also creating the predictable initial worries about dangers to US exports. But news like this often gets a two-phase reaction. The first reaction is negative, and nowadays is wildly amplified by news-driven algos and the algos that chase those algos.

Following that usually comes a “but then again” reconsideration. Oil near six-year lows means we have the same gas prices as we had at the Obama inauguration and the recovery that began (as a consequence or coincidence, depending on whom you ask) soon afterwards. Only now we have one-third the budget deficit, twice the stock market value, economic growth of 5%, low interest rates, and a friendly Fed. And once again we have cheap gas. Which part of that is bad?

ES long-term  1_29_2015

 

It may help to zoom out a bit and look at a longer-term chart. We can only say algos and volatility and whoa! so many times. Bloomberg pointed out yesterday that the drop yesterday was the largest decline after a Fed decision since June 2013. After that decline, the market rallied in July 2013 to a new high and then continued to rise, in waves up and down.

The latest round of up and down waves since October has been more dramatic, but still within established ranges. While it means a rough ride for some at the moment, it may represent a great buying opportunity for mutual funds looking to buy at month’s end.

Star Wars Bingo

(This portion by Danny.) Sure I favor the long side, and it has up to this point been the correct trade, but as your street guy, I have to tell you…this trade is NUTS!!! To be honest, I am not sure what the downside driver was yesterday. It looks like the street sold the AAPL news. The news that the Fed was going to stay patient with raising rates should have been a good thing, but they sold that too.

Below is something I said in yesterday’s Opening Print. Yesterday’s decline fell right in line with what I said.

There has been some crazy stuff going on in the S&P futures so far this year. The S&P futures (ESH15:CME) have been up and down and all around. In the first 3 trading days of the year the ESH15 fell 58 handles: Jan 2 -6.1, Jan 5 -30.4, Jan 6 -21.5. The next two days the futures rallied 60.3 handles: Jan 7 +25.2, Jan 8 +35.4.Over the course of the next 4 days it dropped again: Jan 9 -19.7, Jan 12 -12.9, Jan 13 -6.3, Jan 14 -8.6, Jan 15 -18.4, a total of 65.9 handles. The next move was a four-day, 67.3-handle rally, Jan 16 +23.8, Jan 20 +3.9, Jan 21 +9.8, Jan 22 +29.8. And the last 3 trading days have been down, up, down. We have seen some rough starts to January, but this one has really been tough to gauge.

To finish it off Jan 26 the ESH15 closed up +9.7 handles and then over the last two days, Jan 27 -23.6 and Jan 28 -38.50 the ESH15 has lost 62 handles. It’s hard to believe and, as I said a few weeks ago, these moves must have a wearing effect on the stock market.

The Year of the VIX

The CBOE’s “fear gauge” VIX jumped for its fifth day of gains, up 4.2 % at 22.39. It seems if there is an upward trend for the VIX; it’s higher. While investors and traders tend to look at the “fear gauge” on a daily basis, it’s sometimes better to look at it in wider time frames.

There seems to be little doubt that 2015 will be a more volatile year than 2014. MrTopStep started talking increased volatility in the beginning of December and has held fast to that idea. We think it could carry on throughout the year. We see the VIX as bullish and trending; it will continue to creep higher, past 20 to the next potential resistance area, the 52-week high at 30.06.

As we said yesterday, in 2014 the average ranges in the ES were 12 to 20 handles a day. Yesterday the ESH15 had a 55-handle range and guess what? There is a lot more to come.

In Asia 9 of 11 markets closed lower and 9 out of 12 European markets are trading higher this morning. Today’s economic calendar starts out with jobless claims, pending home sales, EIA Natural Gas Report, 5- and 7-year note auction, Fed Gov. Jerome Powell and Kansas City Fed President Esther George speaking, Fed balance sheet, money supply and earnings from Abbott Laboratories (NYSE: ABT), Ford Motor Co. (NYSE: F), Google  (NASDAQ: GOOGL), Dow Chemical (NYSE: DOW), Amazon.com  (NASDAQ: AMZN), and Alibaba (NYSE: BABA), among many other multi-billion-dollar companies. It is one of the heaviest earnings days of the season.

Buy Bonds / Sell S&P

Our View (Danny Riley): Can you believe how algoed up the ESH and CLH are? I can’t remember a time other than the height of the credit crisis when there was so much program and high-frequency trading going on. I have to ask you, did you think the ESH was going to trade all the way down to 1990? I didn’t. (And while I had it on my chart, I didn’t, either. — Vikram)

I have to admit that while I am noncommittal on the direction of the stock market, this buy bonds / sell S&P asset allocation has been very consistent. 10-year Treasury yields sank to 1.72%, the lowest since May 2, 2013. Let’s face it, January 2015 has started the year off with a bang and it’s far from over. Don’t forget the old trading adage, “How January goes, goes the year.”

As of yesterday’s close the Dow is down -3.5% in 2015 and off -4.8% since making its Dec. 26 record high. S&P is now down 4.7% from its Dec. 29 record high. Despite positive remarks by the Fed that it will remain patient, there is definitely some type of shift going on. Into bonds and small caps stocks seems to be the trade, but how long will it last?

The other part of the picture is the currencies, which at some point will wreak havoc on the multinationals.The U.S. dollar index (DX-Y.NYB) rallied to session highs after the Fed’s statement, gaining 0.56 percent on the day to 94.551, below Friday’s 11-year high.

Is there a meltdown coming? Or will the S&P do another repeat, catch everyone short again and rip higher? We think the market will find support and rally, but if the ESH does start breaking down, the levels we are watching are the 1985-1988, 1966-1970 and the 1951 level.

Our view is to get a look at the first 30 to 45 minutes of trade. If the overnight support range of 1987-1997 holds and the market breaks out to the upside, sell rallies and buy weakness, but don’t expect a huge move up. The short-term trend is still down and short-sellers who stay nimble and not greedy may see another run down like we’ve had the last two days.

Above all, expect volatility. It is an earnings report extravaganza today and the news algos (not to mention humans) will be especially nutty.

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

  • In Asia 9 of 11 markets closed lower: Shanghai Comp. -1.31%, Hang Seng -1.07%, Nikkei -1.06%
  • Earlier in Europe 9 of 12 markets are trading higher: DAX +0.14%, FTSE -0.23%, MICEX +1.17%, Athens GD.AT +2.84%
  • Fair Value: S&P -6.11, Nasdaq -7.01, Dow -70.26
  • Total Volume: 2.09 mil ESH and 10.6k SPH traded
  • Economic schedule: Jobless claims, pending home sales, EIA natural gas report, 5- and 7-year note auction, Fed Gov. Jerome Powell and Kansas City Fed President Esther George speaking, Fed balance sheet, money supply and earnings from Abbott Laboratories (NYSE: ABT), Ford Motor Co. (NYSE: F), Google (NASDAQ: GOOGL), Dow Chemical (NYSE: DOW), Amazon.com (NASDAQ: AMZN), and Alibaba (NYSE: BABA)

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