The ESH16 gapped 18.5 handles higher, pulled back a few handles, and then did exactly what we said it would do.
09:39:48 TRADINGDATA2: (driley) ESH going for the Globex retest / I still think we go up but 1938-1940 could be an early wall having already rallied 43 handles and every Tom, Dick and Harry talking “Turn-Around” Tuesday.
Not long after the ES made its highs we pointed out the selling on the imbalance charts and then the ESH16 sold off down to 1923.25. If you read between the lines what I was trying to point out was that with the S&P up 47 handles from Mondays 1892.50 Globex ‘retest’, the futures may be overdone short term and to keep an eye on the 1937.50 Globex highs. Despite the big overnight rally and early push higher the S&P again was overpowered by the weakness in the energy sector with crude oil futures (CLG16:NYM) breaching the $30.00 level, the lowest level since December of 2003, as big oil companies continued to cut staff. Keith Phillips the Dallas Federal Reserve’s senior said “the biggest risk to the forecast is if oil prices are in the range of $20 to $30 I expect job growth to slip into negative territory as Huston gets hit much harder and greater problems emerge in the financial sector”
One of the things I have continued to say is that with crude oil prices dropping so sharply, (down over $10 in the last month) prices would continue to be under pressure because of all the military spending due to the ongoing wars in the Middle East, with Saudi Arabia topping the list. These wars are not getting any closer to ending, and with Iranian sanctions being lowered, Iran could start dumping oil below the Saudis prices. At that stage oil will start to capitulate and a potential low could be in. I am not sure how low oil can go but I do not see $20 a gallon.
Military spending per capita. ($)
Saudi: 2803
Israel: 2755
US: 1821
UK: 964
Russia: 488
France: 804
China: 95
The selling in the energy sector remains the main driver to the markets right now. Yes, China is a big driver also but the low price of oil is at the center of the weakness in the US stock market. If oil were to rally back to $35 or $36, I believe that the ES would trade back above the 1980 level. According to Janes.com Saudi Arabia has replaced India as the largest defence budget for U.S. arms suppliers worldwide and took the top spot as the number one trading partner for the US in 2014, according to the IHS annual Global Defence Trade Report.
One out of every seven dollars spent on defence imports in 2015 will be spent by Saudi Arabia. http://www.janes.com/article/49809/saudi-arabia-replaces-india-as-largest-defence-market-for-us As traders we do not generally talk about military budgets, but with the economic slow down in China and the ongoing wars in the middle east, this area of the world has become the global hot spot and it does not look like its getting any better. Some military analysts say it could be another 10 years before there is an actual outcome. The Jane’s article lays out who the players are, how much they are spending and how Russian exports are facing a challenging time.
I have said many times that the price of crude oil is being affected by Middle East military expenditures just as much as the global slowdown. With the global economic downdraft where it is today and the on going wars around the globe we do not think the current volatility is going to change anytime soon, but we do think US stocks are setting up for a bounce.
In Asia, 10 out of 11 markets closed higher (Shanghai Comp -2.42%), and in Europe 10 out of 12 markets are trading higher (DAX +1.10%). Today’s economic calendar includes MBA Mortgage Applications, Eric Rosengren Speaks, Atlanta Fed Business Inflation Expectations, EIA Petroleum Status Report, Charles Evans Speaks, 10-Yr Note Auction, Beige Book and Treasury Budget.
Our View: Our buy weakness only call worked early and late in the day but the futures sold off all the way down to 1905.75 before running back up late in the day. That said the S&P made a higher low and was doing a little late back and fill. My gut says we trade back up to the 1960 -1979 level by the end of the week. Again, if oil can short cover a little and China starts moving up Europe will go for the ride and so will the ES. The upside is loaded with buy stops. Sell the early rallies and buy weakness.
Download all of the January expiration stats here.
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 10 out of 11 markets closed higher: Shanghai Comp -2.42%, Hang Seng +1.13%, Nikkei +2.88%
- In Europe 10 of 12 markets are trading higher: CAC +1.50%, DAX +1.10%, FTSE +1.16% at 6:30am CT
- Fair Value: S&P -7.69 NASDAQ -9.13 Dow -94.65
- Total Volume: 2.4mil ESH and 6.8k SPH
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