The S&P 500 futures had a 79 handle rally (2040 to 2119) in the days leading up to the Brexit decision. After flipping from staying in the European Union to leaving, the British go vote sent shock waves through the global financial system. After a ‘limit’ down move on Globex the S&P futures opened at 2031.50, 32.50 handles off its overnight low, and then rallied all the way up to 2064.75, down 40 handles on the day and up 65.75 handles off the Globex low. After the ESU16:CME made the high the future’s sold back off to new daily lows at 2030.25 around 1:30 CT. Part of the reversal back down was the continued unknown of the British leaving the EU, and the other part was the Russell 2000 rebalance, which resulted in a gross notional turnover of approx. $42.3 billion in Russell stocks. It was a wild day. Big gap down, big reversals to the upside, and then a late day reversal to the downside with the S&P futures (ESU16:CME) making several new late day lows but still closing 19.25 handles above the 1999.00 Globlex lows. Clearly the uncertainty caused the late day selling.
As I have said a few times lately, a well known trader once told me that ‘smart traders’ trade up to the event, but not the event,’ and I feel quite certain that there were a lot of losses that occurred. Going into the ‘event’ the big investment firms and mutual funds started to sell billions in stock and other investments. In my opinion many were over hedged, and with the polls continuing to point to the Brits staying in the EU, last week’s stutter step higher and Thursdays nights 2119.50 Globex high squeezed a lot shorts. Many people I spoke to said they had set up downside protection, but later last week when the futures started to rally, they ‘adjusted the other way.’ I am sure some big money was made, but when the futures firms increased margins on Wednesday and the calls started going out Friday morning, there was forced liquidation going the other way. The clearing firm calls the customer and says that he or she has to put up more margin. Lower the size of the position or put more money up. Sometimes the firm locks you out and blows out the positions. In the old days, if you knew the firm and the firm knew you were good for it, they could give you a few days, but with all the new regulations you are lucky if they give you a few hours.
On Friday the Dow closed down 611 points wiping out the year’s gains. The drop was the largest since August 24th and sent shock waves across a wide range of financial markets. In the world of risk on risk off, gold soared 4.7% to $1,322.40 as trades shifted to safe-haven assets. While last week’s bank stress test went positive, the fall out of Brexit for the banks is still unknown.
Many bank analyst are now saying investors should brace for lower trading activity that generally happens as investors push to the sidelines when there is so much geopolitical and financial uncertainty. The walk away from Brexit over the next several months will lead to even more uncertainty over the financial health of Britain and the European Community as more of the 27 members question the membership and its benefits. A $13 billion dollar fund I used to execute business from on the trading floor told me that many of the funds and banks worked overnight and right into the day session. He told me it was hard to get deals with several of the big banks like Citigroup and JPMorgan. He said the trading desks were swamped starting Thursday night into Friday’s close, and getting transactions done was ‘like using the trading floor during a crash,’ they just could not keep up. He said over the years they have let so many of the desk people go that there was no way to keep up. J.P. Morgan’s head of rates and FX, Troy Rohrbaugh, said the bank expected Friday to do three times a typical day’s volume in global FX, which will be a record for that business.
3 Parts To The Trading Day
One of the things I continue to look at are what I call the 3 parts to the trading day. The first part or Part 1) Is the Globex night session, Part 2) is what happens after the 8:30 CT futures open, and Part 3) is what the institutions have to buy or sell late in the day. Thursday nights drop, Friday mornings pop, and late afternoon drop all fit in my 3 parts view of how the S&P works.
So where from here? I heard someone on CNBC mention Lehman brothers. Long before that I was already talking counterparty risk. This is going to continue to be an area of unknown. Therefore, I think it’s fair to say things will remain volatile at least for the first part of the week, but I also think there is a possible bounce as we go into the end of the second quarter rebalance. According to the Stock Trader’s Almanac, the last trading day of June is bearish, down 17 out of the last 24 occasions. The Nasdaq has been down 6 out of the last 10 occasions, but the first trading day of July (Friday) has the Dow up 21 0f the last 26 occasions, with an average gain of +0.50%.
In Asia, 7 out of 11 markets closed higher (Nikkei +2.39%), and In Europe 12 out of 12 markets are trading lower this morning (DAX -2.06%). This week’s calendar features 26 economic reports, 3 Fed speakers and 11 Treasury auctions, announcements or settlements. Today’s economic calendar includes international Trade in Goods, PMI Services Flash, Dallas Fed Mfg Survey, 4-Week Bill Announcement. 3-Month Bill Auction, and a 6-Month Bill Auction.
Keep Your Chin Straps Handy
Our View: Sure these are the times that some people make big money, but this is also the time small accounts can get crushed, so if you are telling yourself you should have done better just remember there is more to come. This is another big week of eco reports, 26 in all, and they include some big numbers. From the International Trade number today, to the GDP number tomorrow, to housing numbers, and Janet Yellen speaking on a panel with Bank of England Gov. Mark Carney, ECB President Mario Draghi, and Brazil Central Bank Gov. Alexandre Tombini at an ECB central banking conference, in Sintra, Portugal on Wednesday. Our view. Japan is considering ‘Unilateral Yen Intervention.’ There could be other countries that try the same thing. We lean to lower prices and selling rallies but can’t rule out some 20 or 30 handle bounces either.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 out of 11 markets closed higher: Shanghai Comp +1.45%, Hang Seng -0.16%, Nikkei +2.39%
- In Europe 12 out of 12 markets are trading lower: CAC -1.94%, DAX -2.06%, FTSE -1.60% at 6:30am ET
- Fair Value: S&P -9.13, NASDAQ -9.79, Dow -105.42
- Total Volume: 4.1m ESU and 12.6k SPU traded
[s_static_display]
No responses yet