These are not your fathers markets, nor are these his charts. Everything we thought we knew about the markets, turns out, we don’t know anything. The mutual funds bought and sold big on the last trading day of April but left little to the imagination when the MiM (MrTopStep Imbalance Meter) started showing big to buy late in the day after a big late day sell off. The final 3 trading days of April was a great example of how the big institutions move money around at the end of the month. While the practice of T+3 ( the buying and selling of stock at month end) has been eliminated by new rules it was clear to see the funds marking down and marking up stocks.
The S&P futures (ESM16:CME) has had a hard time catching a bid above ES 2100.00 and over the last few weeks has started to show some signs of tiring. MrTopStep talked about ‘some type’ of end of the month walk away trade but we have to admit Friday’s late day sell off and 18 handle rally in about 60 minutes seemed to catch most trades off guard.
The month of April ended in interesting fashion, particularly the last few sessions. The month overall was thin-to-win on mostly declining volume and traded above 2100 twice in the second half of the month. Last year we noted how 2100 was the key price for the first half of the year and volume would shrink as the futures rose to that level then as price found resistance there, then volume would pick up. This was the same type price action that we saw in April, very similar to the monthly highs of November and December when the S&P futures would climb above this price one day, then fail the next day leading to further declines. However, even though the equity markets saw their heaviest declines since the February 11th lows last week, dip buyers pushed the ESM hard late in the day Friday on top of that $2.2 billion to buy MOC, thus keeping the monthly close positive for the third month in a row. But, the damage was done, if there was any doubts surrounding the key psychological and technical 2100 pivotal area, then all doubt should be erased as that level becomes the risk marker for bulls and bears to measure upside healthiness.
Sell In May?
To the downside, and for now, 2050 seems to be the key level to watch, that which as resistance on the way up to 2100, should in turn provide support for at least the first touch and it did so Friday bouncing near that area. Remember, even though the futures traded to 2045.75, often times a key support level will permit price to trade below briefly, suck in new shorts before running the buy stops higher as we saw on Friday. Below 2050, the 2025 area comes into play then more importantly the 2000 area.
Last year, the “sell in May” tactics didn’t show initial results but that doesn’t mean the old adage doesn’t work but merely suggests that the best seasonal period for the markets are over. This showed true last year as the benchmark S&P 500 made its 52 week in May then steadily declined into the August sell off. Given the seasonality, and also the fact as Bank of America/Merrill Lynch’s Hedge Fund Monitor reported last year that funds had strong short conviction between 2050-2100 that was not easily deterred, we see gains limited over the course of the summer and a likelihood that the price range won’t see expansion until late summer, similar to last year.
If funds were so heavily bearish last year at these levels, what would make them anymore optimistic this year? There is possibly more Fed uncertainty this year than in 2015 as the case has been made by Fed members that rates could go in either direction, or more stimulus injected in the markets. Also, an upcoming presidential election combined with economic growth limited both domestic and abroad leaves the markets vulnerable. However, one thing that concerns me going forward as a borderline pessimist is that unlike last year, sentiment is clearly screaming bearish. And for those who wish to know why the price action seems so “healthy” right now with earnings and other economic indicators such as GDP coming in to low, I point to that sole reason, that the bus has been filled with solid to overweight bears leaving it hard to see further decline, and in fact providing fuel to the buyers in the form of upside buy stops.
Overnight, world markets remained weak, but the ESM16 chugged higher and is currently trading just ticks from the globex high, up 6 handles to 2065.00. The calendar this week is anything but light and features the NFP later this week. The trend over the last two years has been to show strength into NFP and then weakness the following week.
In Asia, 6 out of 6 markets closed lower (Nikkei -3.11%), and In Europe, 8 out of 12 markets are trading lower this morning (DAX +1.01%). This week’s economic calendar features the non-farm payroll and 24 other reports, 6 Fed speakers and 13 U.S. Treasury events. Today’s economic calendar includes 2-Yr Note Settlement, 5-Yr Note Settlement, 7-Yr Note Settlement, Gallup US Consumer Spending Measure, Dennis Lockhart Speaks, PMI Manufacturing Index, ISM Mfg Index, Construction Spending, 4-Week Bill Announcement, 3-Month Bill Auction, 6-Month Bill Auction, and John Williams Speaks.
Our View: It’s the first trading day of May which has the Dow up 13 of the last 18 occasions, also a “Mutual Fund Monday” and based on how the futures closed we think we could see higher prices today. Globex volume at 7:00 am CT is only 133K which leads us to think that the day could be setting up for a thin-to-win grind higher. There are numbers at 8:45 ct and especially 9:00 ct to keep an eye on. Prices we will be watching intraday to the downside will be the Euro session low of 2057.00, globex low of 2055.50, the round 2050 level and Friday’s low of 2045.75. Upside levels will be 2070.75 (25 handles from Friday’s low) and the 2075.00 area. We lean toward buying early weakness only, with the 2055.00 area a good spot for first touch support. We lean to selling higher prices waiting for a move to 2070 or better yet, 2075. Below 2055 we think 2050 and 2045 are likely to print and Friday’s low could work as a first touch support but below that price could get very messy.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 6 open markets closed lower: Shanghai Comp c%, Halosedng Seng closed%, Nikkei closed -3.11%
- In Europe 8 out of 12 markets are trading lower: CAC -0.53%, DAX +1.02%, FTSE -1.27% at 6:30am CT
- Fair Value: S&P -6.27 , NASDAQ -8.73, Dow -83.43
- Total Volume: 2.4mil ESM and 8.7k SPM traded
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