Yesterday, the S&P 500 futures had been trading in about a 10-handle range when the European Central Bank released a statement that surprised many analysts, expanding their quantitative easing programs for now and slashing the main refinancing rate and cutting the deposit rate. Both equities in the U.S. as well as in Europe initially responded positively to the news, but after ECB President Mario Draghi’s remarks following release, which seemed to indicate that there is no room for further easing after today, the markets reversed and began to sell lower.
The ESH16, which had traded to a high of 2010.25 just before 7:00 am CT, traded down to 1992.75 in the first 15 minutes of the 8:30 am cash session. The equity markets did attempt an early bounce trading back to 2004.75, but failed to hold the bid; and as sell programs continued to hit the tape, the S&P made new lows, pushing down to 1967.75 on the March contract, down more than 40 handles from the post-ECB high.
The markets did recover late in the day, rallying up to 1992.25 in the final hour before closing at 1989.25, flat on the day. This created an outside day which eclipsed both the high and the low from Wednesday. However, the market also closed in a doji formation, with the close in the same area as the open. Volume was heavy in the S&P 500 derivatives, such as the futures and SPY ETF, but remained more passive in the underlying equity markets that make up the Standard & Poor’s 500.
2000 & The PitBull’s Thursday Low?
A great deal of this week’s price action has taken place between the 1985-2000 area. For the third time in five sessions the index was unable to hold gains above the key 2000 area that we have been noting over the last week. The two sessions this week that did not touch 2000 still traded within 10 handles of that mark. Buyers seem reluctant to hold above that psychological area, and for good reason. However, with buyers again stepping in at the lows to keep the bullish momentum going, it’s clear that bears are not taking over this market and that the next test of 2000 could likely be the one that holds.
Bring On March OPEX & FOMC
Option expiration weeks tend to be bullish. In addition, quad witching, which occurs when the quarterly futures contracts expire on the same day as OPEX, is coming up next week and tends to be even more bullish. Particularly the March quad witch is strongly bullish historically, having closed higher 22 of the last 32 years for the S&P 500.
We can’t forget that Wednesday of next week is the FOMC announcement. The Fed Fund Rate futures suggests less than a 10% chance of a March hike, and we agree; and the Fed Fund Futures does not show a probable hike until December. However, economic indicators seem to be somewhat leveling out. The employment market continues to look strong, evidenced by last week’s non-farm payroll number and the equity rally, which combined to leave the markets closer to new all-time highs than last month’s lows; and we know that the possibility of the Fed raising rates over the next few months is back on the table. Given this, the Fed’s statement will quite likely produce at least an initial reaction. Some say the Fed won’t raise rates immediately after the volatility we have seen this year, and that is likely. However, the Fed did raise rates in December, just four months after the beginning of a market correction; and a rate raise this summer could be plausible, given the Fed’s economic and inflation targets, as well as the Fed’s own expressed expectations for this year. While we don’t think March will produce a hike, we do see a possible open door for a hike this summer. Remember, last August, no one believed that there would be a December rate hike.
In Asia, 11 out of 11 markets closed higher (Shanghai Comp +0.20%), and In Europe 11 out of 12 markets are trading higher this morning (DAX +2.88% ). Today’s economic calendar includes Import and Export Prices and the Baker-Hughes Rig Count.
June Roll
Our View: With yesterday’s roll the June contract has now become the front month. Overnight the ESM16 rallied from it’s 1980.00 close up to a high of 2002.25, a 22.50 handle rally, and is currently trading at 1998.00, just 4.50 handles off the highs. The dip buyers stepped in again but the futures have met resistance at yesterday’s high. My call was for the next 50 handles to be higher, and with the worst part of the week behind us, a light calendar today, as well as a pending bullish expiration next week, it appears that if bulls can control the cash open, that there is a good chance today of a thin-to-win trade leading to a late Friday RIP. Our call is to buy the early weakness today in the S&P futures.
As always, please use protective buy and sell stops when trading futures and options.
‘The DAX, the S&P, and say SOLD the European Central Bank QE Bazooka!’
- In Asia 11 out of 11 markets closed higher: Shanghai Comp +0.20%, Hang Seng +1.08%, Nikkei +0.51%
- In Europe 11 out of 12 markets are trading higher: CAC +2.79%, DAX +2.88%, FTSE +1.40% at 5:30am CT
- Fair Value: S&P -9.59, NASDAQ -10.91, Dow -99.46
- Total Volume: 2.7mil ESH 1.0mil ESM and 14.4k SPH
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