Things change fast in the investing world. Just yesterday some polls showed people thought that the Federal Reserve will raise interest rates twice this year, and four times next year. MrTopStep has remained constant on a few issues, and one of them is the Federal Reserve’s push to raise interest rates this year, and that the Greeks will default long before they agree to pay back the near $300 billion in creditor loans.
Yesterday the Federal Reserve signaled that lower unemployment is worth the risks of keeping rates low for a longer period of time, but said it remains on track to raise interest rates later in the year. Personally, I do not think the Fed will raise rates this year, but I do expect higher rates in the first quarter of 2016. While the Fed would welcome an overheated economy to help push inflation back to more normal levels, restore confidence, and help replace some of the growth lost during the credit crisis, even Janet Yellen spoke of the risks of moving too early. Moving too late, on the other hand, could cause inflation to overshoot. I have said it’s going to be hard to raise interest rates this year but when the IMF warned to take a slower approach, seeing the Fed back pedal is really not a surprise.
The S&P futures were firm early on, but lost momentum leading up to the FOMC headlines. In the MrTopStep view yesterday, we explained that one of our trading rules was to “fade” the initial move after the Fed headlines hit the tape, and after a quick jolt down below the 2080 level, the ESU15 made a low at 2078.50 at 1:01 CT. It then stormed all the way back to new daily highs at 2098.75. After the move up, the ES drifted back down to the 2088-2089 level going into the 3:15 futures close. All in all, there were clear opportunities on the down side and up side, if you were able to avoid greed and exit wisely.
Our View: The S&P cash study shows today, the Thursday before the June Quad Witching, up 19 / down 12 of the last 31 occasions and expo Friday up 22 / down 9 of the last 31. Barring some wayward Greek headline we think there is a good chance the ES trades down a little, and then goes back up into the expiration.
The next thing to start thinking about is the Q2 S&P rebalance and the end of June. This was when all the MOC selling started at the end of March. It continues to sell on the close now. At the end of the day the S&P saw some wild swings, looking like it was going to close right off S&P 2100 and then, as it has done almost every day, sold off as the MiM went from small buy to MOC Sell $170mil.
In Asia 8 out of 11 markets closed lower (Shanghai Composite -3.67%), and in Europe 8 out of 12 markets are trading modestly lower this morning. Today’s economic calendar starts with Consumer Price Index, Jobless Claims, Current Account, Philadelphia Fed Business Outlook Survey, Leading Indicators, EIA Natural Gas Report, 2, 5, and 7 Yr-Note Announcements, 30-Yr TIPS Announcement, Money Supply and the Fed Balance Sheet.
Narrowest Trading Ranges Since 1989
Chart taken from Bloomberg
Our View: Its 8:00 CT and the ESU15 is trading 2086. What’s happened to these markets? How long can volatility stay so low? What will be the catalyst for the next move up or down? Barring a surprise attack on the downside, I expect the S&P to remain in its trading range. So far 2015 has the dubious honor of providing traders with the narrowest range of returns EVER. According to Bespoke Research, the S&P hasn’t produced gains or losses of more than 3.5% at any point over the 109 trading days this year. After going up for 5 years the 6th year of the Bull run has the S&P stick 10 handles either side of S&P futures 2100. Our view is two fold; you can sell the rally and buy weakness, or just wait for the ES to pullback and buy it.
- In Asia 8 of 11 markets closed lower: Shanghai Comp. -3.67%, Hang Seng -0.22%, Nikkei -1.13%
- In Europe 8 out of 12 markets are trading lower : DAX -0.54%, FTSE -0.08%, MICEX +0.06% , GD.AT -0.75% at 6:00 am CT
- Fair Value: S&P -8.22, Nasdaq -8.09, DOW -87.14
- Total Volume: 1mil ESU and 6k SPU traded
- Economic calendar: Consumer Price Index, Jobless Claims, Current Account, Philadelphia Fed Business Outlook Survey, Leading Indicators, EIA Natural Gas Report, 2, 5, and 7 Yr-Note Announcements, 30-Yr TIPS Announcement, Money Supply and the Fed Balance Sheet.
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