One thing I have heard Danny Riley say for years is that “you have to follow the money.” This is why he watches order flow during the trading day and calls out in prices where he sees large buy and sell orders being filled.
This is also why for some time we have followed the market-on-close orders (MOC). Quoting Danny from last year: “These closing orders have always been part of the day’s trade. Sometimes they are big, sometimes small, but they are always there. Some people say they do not pay attention to them, but we do, and we can clearly show you how these imbalances move the S&P up and down.”
Last year when the S&P 500 (^GSPC:SNP) was coming off its October lows we noticed and pointed out large MOC orders starting to pre-empt the rally.
This year, noticeably for a market that has just made a new all-time high, it has also seen an exit of money flow on market-on-close orders to the tune of $7 billion; furthermore, that number is $5 billion in MOC sells alone for the month of April, and with the last two trading days of the month remaining, we could possibly see that imbalance increase.
So, where has the money gone … and when will it return?
Today marks the end of the two-day FOMC meeting and I speculate that when the day is over we likely will not know any more than we already do know, that the Fed will tighten but we don’t know when exactly. Over the last year many analysts have forecasted the “when” and now many have had to alter their projection date. Produced from all of these failed analyst predictions and with a Fed that lacks clarity, there has been a considerable amount of uncertainty in the market over the course of this year.
We know our markets do not thrive on uncertainty, and it could be a while before any sense of certainty returns. Last year it was taper talk, this year it is tightening, and by the time the Fed does raise interest rates we will be entering into a political year which is always surrounded by uncertainty. In other words, we could be in this market environment for a while.
As we approach the seasonal “sell in May and go away” there is some caution as we have had to adapt this year to a less energetic bullish bounce to lean on. In prior years the market didn’t seem so tired and extended when it made a new high. There was always more energy, more buyers and more money to push it even higher. That’s not the case at this point this year, the money has not been flowing in as quickly as it flows out and may not return as soon and so we may have to further adapt.
We are traders. That’s what we do. Danny will tell you his desk at the S&P pit has operated from the 1987 crash to the tech boom and bust of the late 90’s and on through the credit crises of 2008 even until the current bull market.
We are not calling a top but we do know that nothing lasts forever and markets do and will change. One thing we must do is adapt.
The Asian markets closed mostly lower and in Europe 10 out of 12 markets quoted are trading modestly lower this morning. Today’s economic calendar starts with MBA Mortgage Applications, GDP, Pending Homes Sales, EIA Petroleum Status Report, 7 Yr-Note Auction and earnings before the open from ATHM CCJ CBG ETN EEFT EVER FCAU BEN GD HES HLT HUM IDCC ISSI IP LL MA MWV MDLZ NSC NOC PCG Q REV SLAB SAVE SNCR TWX VRX and after the close from AFFX DOX AM AR ASH BIDU CMO CAVM CMPR CW DYAX EQIX FLEX GLUU HF HOLX IPCM KEX LQ MAR MEOH NXPI PRXL SFLY TAL TPX VRTX.
Our View: Danny told the PitBull on Monday when the (ESM15:CME) was touching the 2120 area that the next 30 handles were lower. Well, it gave us just over 31, making a low yesterday at 2088.25, and is currently trading back to 2110 right now in this morning’s Globex session.
Right now it looks like this market makes a new high, sucks in more buyers and then goes offered with sell programs pushing it down 20-30 handles before the selling gets exhausted. MrTopStep has been noting for weeks this is a two-sided market that is trying to put in higher lows.
This market has typically been giving direction on both sides on every day and our lean is to fade the morning moves, then fade the afternoon moves. You have to buy low and sell high. The PitBull suggest that we are in a 2080 – 2120 range and we agree.
Just a note: Typically there is a run-up into the FOMC meeting and a small run-up a day or two afterward, but those gains usually begin to taper off two or more days after the FOMC meeting ends, which has us looking toward next week for the PitBull’s Thursday/Friday week before expiration low.
As always, please use protective buy and sell stops when trading futures and options.
FairValue Trader
- In Asia 9 out of 11 markets closed lower: Shanghai Comp. +0.01%, Hang Seng -0.15%, Nikkei +0.38%
- In Europe 10 of 12 markets are trading lower: DAX -0.25%, FTSE -0.17%, MICEX +0.53%, GD.AT -0.33% (at 6:00 am CT)
- Fair value: S&P -6.28 , Nasdaq -7.65 , DOW -78.45
- Total volume: 1.47 mil ESM and 3.4k SPM traded
- Economic schedule: MBA Mortgage Applications, GDP, Pending Homes Sales, EIA Petroleum Status Report, 7 Yr-Note Auction
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