We have always had a rule to fade the first move after a Fed announcement. Yesterday was a great example. But the MrTopStep Imbalance Meter (MIM) was stuck showing 90% to the buy side … Just after the close the Pit Bull called me. He traded like a maniac all day … For today: It could just as easily be said that these post-news moves were already priced in. The Pit Bull says he thinks we are close to a high in oil and said the S&P is heading …
It’s 12:59, one minute from the Fed headlines, and the 10-year options are starting to trade. Now the news is hitting the S&P as the ESU just popped up from 1644.50 to 1649.50 in a matter of a few seconds. Why? Because the Fed just backtracked, making headlines that “Almost all FOMC Officials Support Continued Accommodative Policy” and “Many Fed Officials Wanted More Job Gains Before Cutting Bond Buying.”
Pop and drop
The S&P popped up into the buy stops from 1649 to 1652.50 and then quickly sold off to 1647. Total volume was extremely low going into the Fed minutes. At 1 p.m. there was a total of 720,000 ESUs traded, with 200,000 contracts coming from the Globex pre-8:30 open. After a push to 1652 the spoos sold off a few handles to 1648.
After what looked like a little back and fill at the 1647-48 level, the S&P gave way to several index arbitrage sell programs, pushing the futures all the way down to 1642 and completing the MrTopStep 10-handle rule. (See MrTopStep’s Trading Rules.)
We have always had a rule to fade the first move after a Fed announcement. Yesterday was a great example. But the MrTopStep Imbalance Meter (MIM) was stuck showing 90% to the buy side going into the cash close. I quickly e-mailed some of our friends on the NYSE, “meter stuck at 97% buys … what u got?” Sure enough, it popped up to 1649 on the close.
Pit Bull in the zone
Just after the close the Pit Bull called me. He traded like a maniac all day in crude and crude options. I like to hear how he battled all day. If you’ve heard of high-volume trading you probably think of an algo system. But in the Pit Bull’s case, it’s just one guy sitting in his home office trading thousands of contracts. When he is like this he goes into a zone that not even he knows he is in. The world around him recedes. A prop trading firm can put out thousands of trades, too, but they are groups of traders, talking, arguing, sometimes tuning out and back in. They are not in that zone.
What he did yesterday looks, on the surface, like what any crude oil option trader does. But you can tell a master trader by how easily he can switch gears. One minute he is telling me about a big call spread he bought yesterday and the 400 CL futures he bought. Then, still talking, now about the movies he’s going to see this weekend, he is selling 150 CL and then buying 200 CL right back.
I know I talk about him a lot, but it is inspiring to see how hard he works. His level of dedication and intensity is something few traders manage, but for the Bull it’s just another day pounding away. It’s rare to be able to watch a master trader at work.
As the call wound down he said he was worried that there may be no Thursday / Friday low this week, that the S&P could easily go to 1675. He also reminisced about a very old trading rule that he used to sing to me over 20 years ago: “Take out the highs, take out the lows.” Back in the open outcry days, he hated the program traders and said the “program boys created that song.” On Wednesday the algos sang that song even louder as the S&P took out buy stops above 1649 early, took out sell stops under 1644, and ran buy stops going into the close.
At 7:00 the Pit Bull called me again to say, “See what Bernanke did? The S&P just rallied 15 handles.” It was billed as a speech on the history of the Fed and nothing to do with quantitative easing, but his answers in the Q&A pointed toward continued quantitative easing.
Bernanke said changes in asset purchases are data-dependent, noting that not being transparent on policy might have had a negative effect on markets. He stated that the current unemployment rate overstates the health of the economy and said highly accommodative monetary policy is what is needed for some time in the future, especially given fiscal restraint, also known as austerity.
Regarding pending changes in the federal funds rate, he emphasized that 6.5 percent unemployment is a threshold and not a trigger. It would be the point for discussing a change in policy. He sees inflation as too low even though part of the reason is transitory (implication: energy costs in past months) and that the Fed still aims for long-term inflation of 2 percent. On the issue of the dollar, the Fed chairman noted that the dollar has improved and said the Fed is focusing on domestic growth, not taking growth from overseas.
While this is a play-by-play of the news from Wednesday as we saw and experienced it in the trading pits, we don’t make the easy cause-and-effect judgment you’ll hear and read in the mainstream media. They’ll say, “Bernanke Q&A causes overnight rally.” Or they may do it in a wishy-washy “Markets rally overnight after Bernanke Q&A.”
But it could just as easily be said that these moves were already priced in, that buy and sell levels were already in the thoughts of the collective, and that the news simply served as a trigger, not a cause. Just as 6.5 percent is a threshold for the Fed to discuss policy changes, maybe Bernanke opening his mouth was a threshold for stocks to try “taking out the highs and taking out the lows.”
It’s time to get your playbook set up for next week’s July expiration, and there is no better way to do that than with the Ned Davis Expiration Study – https://mr-topstep.com/index.php/equities/3687-expiration-study-for-july
Our view: The Asian markets closed sharply higher across the board and all 12 markets in Europe are up. My question is, did the Fed create the selloff with all its tapering talk? Yes, it did, and now it has done a big flip-flop. The Pit Bull says he thinks we are close to a high in oil and said the S&P is heading back to 1675. He tends to be right, but he also tends to be a few days early. That said, we have numbers to get past this morning and a 30- year bond auction today. As for the stats:
- The S&P futures have closed higher 10 out of the last 11 days or +59.6 handles.
- The S&P futures have closed higher 5 out of the last 5 days, up 41.4 handles.
- The S&P futures have seen their largest advances since January.
Tuesday June 25 +15.2
Wednesday June 26 +14.1
Thursday June 27 +11.1
Friday June 28 -7.3
Monday July 1 +7.4
Tuesday July 2 +.50
Wednesday July 3 +1.9
Friday July 5 +18.2
Monday July 8 +8.2
Tuesday July 9 +10.1
Wednesday July 10 +3.0
Our view is we have been saying that higher yields won’t stop the S&P from going up, and at 5:30 a.m. the ESU is up 16 handles at 1664.50, up 52.3 handles in 5 days. We lean to selling the open or the first 2-4 handle rally above the opening range and then look to buy weakness. Hate to get ahead of myself … but S&P 1700 is ON TAP.
As always, keep an eye on the 10-handle rule, and please use stops when trading futures; live to trade another day.
- It’s 8:15 a.m. and the ESU is trading 1665.75, up 17.25 handles; crude is down 67 cents at 105.85; and the euro is up 176 pips at 1.3062.
- In Asia, all 11 markets closed higher (Shanghai Comp. +3.23%, Hang Seng +2.55%, Nikkei +0.39%).
- In Europe, 11 out of 12 markets are trading higher (DAX +1.22%, FTSE +0.59%).
- Today’s headline: “The Great Bernanke Backtrack”
- Total volume: LOW 1.46 mil ESU and 8k SPU
- Economic calendar: Chain store sales, jobless claims, import-export prices, nat gas number, Daniel Tarullo speaks, 30-year bond auction, Treasury budget, Fed balance sheet, money supply
- Fair value: S&P +19.63, NASDAQ +31.64
- MrTopStep Closing Print Video: https://mr-topstep.com/index.php/commentary/3732-closing-print-7-10-2013
- Ned Davis Expiration Study for July – https://mr-topstep.com/index.php/equities/3687-expiration-study-for-july