One of the main trading rules that we followed on the trading floor in the S&P 500 futures pit was called “Mutual Fund Monday”. The idea behind mutual fund Monday is that money brought in the mutual funds during the course of the week is not put to work until the following Monday. Thus there is a tendency for the S&P to move higher on Mondays. However, over the course of time, that trading rule has somewhat dissolved like many other standards we used to watch.
Before every Monday there is a Friday, and over the last several weeks, if the markets closed firm on Friday and were up on Sunday night Globex, there has been a tendency to follow through to the upside on Monday, and that’s exactly what happened yesterday. What we’ve tried to point out many times is that when everyone thinks the same thing, the S&P has a tendency to move the other direction, and clearly at Friday’s close most thought the markets would be weak heading into Monday. It’s our belief that once the algorithms pick up on the retail traders having been too long or too short into a rise or decline, the systems push the futures in the other direction.
Yesterday the S&P futures opened 11 points higher, pushed higher, trading all the way up to 1969.00 in the first hour, and then just fell apart, sinking down to 1944.75. One of the things clearly lacking in yesterday’s trade was volume, only a total of 1.5 million contracts traded, and that includes the 250k trading in Globex. That is over 1 million contracts lower than last week, and over 2 million contracts lower than two weeks ago when the S&P futures were seeing 40 to 60 handle trading ranges.
While the VIX has fallen, intraday volatility still remains extremely high. Very few people are talking about it but there are some huge losses that have occurred over the last several weeks as the markets hurled lower. While it was expected that there would be some type of decline in the early second half of the year, no one anticipated the speed of which the markets would sell off and bounce back.
As the ESZ15.CME heads into the end of the quarter, the final 4 days of the month tend to be bullish, and then bullish into the first few days of October, but turn very negative going into the middle of the month. So while we may think the markets still have potential to go lower we also want to pay attention to the seasonal statistics going into the end of September and the beginning of October. As we pointed out in the last few Opening Prints, there is an exceptionally high level of economic reports coming out over the next nine trading days, and as trading volume has decreased in recent sessions, it’s only a matter of time before volume spikes again and price moves outside its current range.
Overnight, during the globex session the ESZ15 opened at 1964.25, slightly higher, and drifted lower in the early Asian session down to 1958 before trading higher into the Asian close/Euro open, making it back to within a handle of the open. Shortly after the Euro open, the bottom fell out for S&P futures as they traded down to 1928.25 in just 4 hours. It’s 6:30 am CST and the futures have come off the lows up to 1935. The index has now dropped about 85 handles in less than 3 full sessions and has traded below the low from last week.
EUROPE SHARPLY LOWER
In Asia, 6 out of 11 markets closed higher (Shanghai Comp. +0.92%), and in Europe 12 out of 12 markets are trading lower this morning. Today’s economic calendar starts with Redbook, FHFA Housing Price Index, Richmond Fed Manufacturing Index, 2 Yr-Note Auction, and Atlanta Federal Reserve Bank President Dennis Lockhart speaks in Montgomery, Alabama.
VOLKSWAGEN PUTS THE HURT ON THE S&P
Our View: I cannot speak for everyone but I think there is a very uneasy feeling to the markets. I can’t pinpoint exactly what it is, but I think it’s too early to say the coast is clear. I predicted back in August, and have been pointing out since then, how the S&P futures have been pivoting on the 1950 level, including having traded within 20 handles of that price for 21 days now, everyday since it’s first touch on August 24th. The question is, when will the ESZ15 break out of that mold and expand it’s range higher or lower? My own feeling is that there is more of same coming our way this week, but as we go into the end of the week, we will be looking at T+3 and the final 3 trading days of the 3rd quarter next week, and it will be time to adjust market view. However, until then, Our view is unchanged; sell the early rallies and buy weakness.
As always; please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 11 markets closed higher : Shanghai Comp. +0.92%, Hang Seng +0.18%, Nikkei -1.96%
- In Europe 12 out of 12 markets are trading sharply lower : CAC -3.05%, DAX -3.10%, FTSE 2.34% at 6:30 am CT
- Fair Value: S&P -10.26 , NASDAQ -13.63, Dow -107.72
- Total Volume: 1.5mil ESZ and 3.8k SPZ
- Economic calendar : Redbook, FHFA Housing Price Index, Richmond Fed Manufacturing Index, 2 Yr-Note Auction and Atlanta Federal Reserve Bank President Dennis Lockhart speaks in Montgomery, Alabama.
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