The S&P futures (ESM16:CME) sold off late in the day Wednesday and rallied a ‘few’ points on the close when Facebook reported record earnings. Everything looked fine in the world of central bank quantitative easing until 11:00 pm when the Bank of Japan (BoJ) threw a curveball at the global markets by offering no additional stimulus. The winds blew through Asia and into Europe and onto the United States doorstep with the S&P futures falling 20 points (handles) in a matter of 15 minutes. MrTopStep wants to be perfectly clear, while I still think higher prices, I also think the global stock markets, including the S&P, have gone too far to fast without any significant pull backs. So am I surprised? Not at all, because at some point, some day it will be more than just the BoJ deciding to cut back, it will be the rest of the world too. We all know that the world’s central banks cannot support the markets forever.
BoJ Leaves Main Policy Unchanged
Like anything good in life, the markets can keep sending a signal that ‘everything is ok’ when it’s not. There has to be an end game. After the BoJ released its statement the Nikkei 225 index dropped -3.6%, in turn the Dow Jones futures dropped 1%, or over 170 points to 17,783, the S&P futures (ESM16:CME) fell almost 20 points, or -1%, and the Nasdaq 100 futures (NQM16:CME) dropped 29.5 points or -0.70% down to 4392.25. The dollar (USDJYP) had a hard time holding the Y108 level.
The refusal of the Bank of Japan to add additional stimulus, defying expectations, is just another signal to investors that the central bank’s march to the beat of their own drum, which is at times out of sync with political and economic realities. After the FOMC release on Wednesday, which was ultimately more or less a dud, the BOJ added the fireworks. There is one thing for certain, monetary policy makers have greater influence, if not control, than at any other time in history.
GDP Release: More Fireworks Ahead?
Capping the globex volatility overnight will be the release of the first quarter GDP this morning. Projections have been very low for this important economic indicator coming in as low as 0.1% from the Atlanta Fed. However, similar to Q1 earnings, the expectations seem to have been set too low, and many excuses offered on why Q1 seems to be sluggish and less indicative. Like earnings, the GDP will probably come in line with low expectations and the markets will continue to shrug off what would otherwise be disturbing news. A “stronger” than expected GDP could even lead to a recovery of the overnight losses. However, we can’t rule out the remote possibility that this number misses, even the lowest projections, and given the weakness overnight, the slope of selling magnifies during the regular session.
We said earlier this week that we were watching the 2070 level and expecting dips to be bought above that price marker, and as sluggish as price has been, buying the dips has worked at this point. However, we see a retest of 2070 today likely leading to further price erosion with last weeks low of 2058.50, and then the 2050 pivotal area, become important price markers to the downside.
According to stats compiled by Chad Gassaway going into the FOMC last month, the S&P 500 has tended to trade sluggish post FOMC day. Interestingly, two post Fed the markets really show weakness. With tomorrow being the end of month, and next week holding the first of the month as well as non-farm payroll, we may start to see how much “sell in May” sentiment prevails in this market as last year the 52 week high was made. April did see a brief trade above 2100 on April 20th then the following day failed that level leaving the index struggling to return. This is similar to the price action from early November and the first two days of last December when the markets failed above 2100, printed the monthly high, and began another swing lower.
In Asia, 7 out of 11 markets closed lower(Shanghai Comp -0.27%), and In Europe, 9 out of 12 markets are trading higher this morning (DAX -1.17%). Today’s economic calendar includes GDP, Jobless Claims, Bloomberg Consumer Comfort Index, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, 3-Month Bill Announcement, 6-Month Bill Announcement, 2-Yr FRN Note Auction, 7-Yr Note Auction, Fed Balance Sheet, and Money Supply.
Our View: Everything we think we know, we don’t. We live in a world of disinformation and the guys with the better seats will always have the advantage. In order for traders to survive we have to learn to adapt fast. It goes way beyond just shuffling your feet or having a forward looking view.
The world is awash with zero rates and cheap money, but the real question is not what the effect is. We see it everyday it’s what’s going to happen when the free money play turns into a pay money play. I came from the floors of the Chicago Board of Trade and the Chicago Mercantile Exchange. I have been part of every major stock market event since 1985. You do not need a degree of higher learning to understand that this is ‘NOT’ going to end well. The use of the world’s central banks to support economies and the stock market can not go on forever. To this point there has been little let up. I have always been a bull market guy. I love buying falling knives, and did very well trading from the end of 2008 to 2014, but things changed at the end of 2015 and the beginning of 2016. The markets did the great 2016 QE Flip that left most people covering shorts and not getting long.
A lot of traders are having a hard time trading, and one of the things I am trying to learn to do is take the better percentage trades. Wait for the markets to move up or down, let the range establish itself and let the program’s exhaust before entering. While no one likes to hear this, you do not have to trade everyday. If you do not see it or feel strongly about a trade, back off, and wait for another set up to come your way.
Our view, It’s important to pay attention to the Globex highs and lows. The ESM was down as much as 22.50 handles and is down 17.50 at 6:30 am CT. There is a high level of economic and earnings reports out today, so it could be a busy day. There are already 280,000 emini S&Ps traded on Globex and there is two hours before the open. We lean to buying the early weakness and selling rallies, especially if there is 450,000 to 500,000 ES traded before the 8:30 CT open.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 out of 11 markets closed lower: Shanghai Comp -0.27%, Hang Seng +0.12%, Nikkei -3.61%
- In Europe 9 out of 12 markets are trading lower: CAC -1.29%, DAX -1.17%, FTSE -0.89% at 6:30am CT
- Fair Value: S&P -5.86, NASDAQ -7.67, Dow -79.57
- Total Volume: 1.4 mil ESM and 2.6k SPM traded
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