The S&P new all-time high: Was it ever in doubt?

You could see it on the trading floor of the CME Group, you could see it on the floor of the Chicago Board Options Exchange and you could see it on the trading floor of the New York Stock Exchange: traders taking Friday off to extend the Presidents Day holiday weekend. Including Globex, only 1.1 million contracts of the E-mini S&P futures (ESH15:CME) traded, and while the weather may have played its part, the higher the S&P goes, the lower the volume gets.

Is the bus too full?

There are always going to be reasons for why the markets should go down. Last week it was weak retail sales, European weakness, Greece, and the effort to hammer out a cease-fire agreement in Ukraine. In spite of all that, by the end of the week the S&P 500 futures ended at an all-time record high close. That’s how the games worked. The news or the press start disseminating negative information over the wires, everybody gets short and then the S&P does nothing but go up. For the past 10 days, the first 10 trading days of February, the mutual funds have bought cash stocks every day in addition to buying billions on the cash close.

Back in January the markets could not have looked worse, but as we went into February a gigantic reversal occurred. It wasn’t long ago that people were talking about a 10% correction, but that seems as unlikely as it has the last 40 months. But we’re still concerned about what happens when all the shorts cover and get long into the rally. The same people talking about a 10% correction are now talking about the S&P breaking out in a 3- to 6-week rally. My own opinion is that the VIX remains high, and with Greece still hot on the burner there’s reason to be cautious. This brings us back to one of Mr.TopStep’s primary trading rules called “Bus too full.” While we’re not saying that the current highs can’t hold, when the customer base gets short into the decline and reverses long into the rally, that rally needs more reason to continue, especially once it nears a big number like 2100. We might see 2102 or even 2120, but there isn’t enough volume to sustain a 3-6 week rally. It’s starting to feel like the bus is getting full.

Earnings

Like many earnings seasons, this one started off with all sorts of warnings, but as more companies reported, it was apparent that the warnings were misguided. With the earnings mostly positive, many traders are looking forward. Of the 391 S&P 500 companies that have reported earnings, about 71.1% have topped profit expectations above the historical average, according to Thomson Reuters data. Over the years we have become used to hearing negative forecasts from analysts despite continued gains in the S&P. In fact, many issued negative statements before the earnings season even began. The most recent rally is a great example of negative expectations and positive results.

While the US exposure to Greek debt is minimal, the uncertainty continues to loom over the broader market, especially after Greece’s latest rejection of a “technical extension” of the bailout agreement. At the end of the day we don’t expect Greece to do the right thing, but we also think at some point Greece will be like all the other negatives that have been put in front of the S&P over the last 5+ years. The stock market will sell off and then make new highs.

In Asia 7 out of 11 markets closed higher, and in Europe this morning 7 of 12 markets are trading higher.This week has a total 16 economic releases, 10 T-bill or T-bond auctions or announcements, the FOMC minutes, the February options expiration and pretty much the end of the earnings season. Today’s economic calendar starts out with the Empire State mfg survey, housing market index, e-commerce retail sales, Philadelphia Fed President Charles Plosser speech on the economic outlook and monetary policy in Philadelphia, Treasury international capital and earnings from Goodyear Tire & Rubber, MGM Resorts International, Potbelly Corp., and Waste Management, Inc.

S&P futures up 7 out of the first 10 days of Feb or up 4 out of the last 6 or up 4 in a row

Our view: The S&P 500 is poised to move higher in the short term. While oil price drops and the Greek debt negotiations remain wild cards, they too will pass. So far fourth-quarter earnings have been strong, showing signs of overall improvement in the economy. After starting 2015 with its largest monthly drop in a year, the S&P (^GSPC:SNP) hit an intraday record on Friday while the Dow (^DJI:DJI) reached its highest point so far in 2015. While the CBOEs volatility index (VIX) has cooled down, most traders think this is just a lull and overall, 2015 will be the year of the VIX.

We lean to selling the early rallies and buying weakness. The Tuesday of the February options expiration week has been up 21 / down 10 of the last 31 occasions.

“The S&P and New All Time Highs; was it ever in doubt?”

As always, please use protective buy and sell stops when trading futures and options.

• In Asia 7 of 11 markets closed higher: Shanghai Comp. +0.76%, Hang Seng +0.24%, Nikkei -0.10%
• Earlier in Europe 7 of 12 markets were trading higher: DAX -0.26%, FTSE +0.27%, MICEX +1.34%, Athens GD.AT -1.12%
• Fair value: S&P-3.26, Nasdaq -0.94, Dow -30.56
• Total volume: LOW, 1.2mil ESH and 3.7k SPH traded
• Economic schedule: Empire State mfg survey, housing market index, e-commerce retail sales, Philadelphia Fed President Charles Plosser speaks in Philadelphia, Treasury international capital and earnings from Goodyear Tire & Rubber, MGM Resorts International, Potbelly Corp., and Waste Management, Inc.

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