After a less-than-two-handle drop on Friday and late push back up, Monday started out like many over the last several months—going up. As of yesterday’s close the E-mini S&P 500 (ESU14:CME) has closed higher 5 out of the last 6 Mondays and is only 14 handles off its all-time high. A stunning turnaround for a contract that only a few weeks ago the public thought was going to crash.
There are a lot of reasons for why the S&P 500 (^GSPC:SNP) rallied. On Friday’s close it was the Russian denial about one of their military convoys being attacked and yesterday the S&P shifted its sights away from Russia and Ukraine back to when the Fed might increase borrowing rates. Tomorrow investors will wait for the Federal Reserve Open Market Committee’s minutes and on Friday focus on Janet Yellen and European Central Bank President Mario Draghi speaking at the annual symposium of central banks in Jackson Hole, Wyoming. This is assuming world events don’t grab the headlines (and algos) again.
In the on-again, off-again world of rate hikes, traders are now starting to shift back to the idea that rates may remain low at least until the middle of 2015. Both Yellen’s and Draghi’s comments will be scrutinized for any change. Overall, investor attention will shift back to monetary policy in the U.S. and Europe and away from geopolitical tension.
There is no doubt that the shift away from geopolitical concerns had a big effect on volume during yesterday’s nearly 16.5-handle rally. On Friday the total volume of the ESU14 was over 1.8 million contracts; yesterday’s total volume was only 885k, with nearly 200,000 contracts coming from Globex pre-8:30 open. As we stated in the MrTopStep Closing Print video, we think there could be a major slowdown going into the end of August.
There are only 9 trading days left in the month and families in the Northern Hemisphere will be going on holiday. So has the U.S. government. According to the congressional calendar, our government officials are only working one day this month.
The S&P has a habit of turning bad news into positive price action. The shift away from Ukraine signals that there is every chance of that happening into September.
The Asian markets are on a roll with 10 of 11 markets closing higher. While we center our research on the S&P and NASDAQ, China has been going up for weeks with little or no pullback. In Europe this morning 10 out of 12 markets are trading higher. Today’s economic and earnings calendar includes the Consumer Price Index, housing starts, Redbook, 3 -6 month T-bill auction and earnings from Home Depot (NYSE: HD), TJX Companies (NYSE: TJX), Medtronic (NYSE: MDT), and La-Z-Boy (NYSE: LZB).
MOC buy $1 billion after a light-volume day
Our view: What happens after the S&P sells off? It gets people to sell at low prices, first of all. Then the selloffs add buy stops above the market which the algos then go after. That is exactly how things worked yesterday.
If that sounds simplistic, if you need a more complex explanation about fundamental weakness in the housing market triggering uneasiness about credit rates leading to concerns about China and a shift towards emerging market small-caps all tied to ongoing worries about Iraq and Ukraine and Vladimir Putin’s haircut … whew! You may be watching too much TV.
Traders look at price, if you come right down to it. There are any number of reasons why this rally is happening. But the key thing to keep in mind is, it’s happening. Make sure you’re with the trend, not trying to know better than reality. Ours is not to question why; ours is but to sell and buy.
With that, we’ll continue our call to sell the early rally or just wait for the weakness and buy. Watch for a pullback in the E-mini S&P (ESU14:CME) to the mid-1960s, after which there are clusters of buy stops and resistance levels up to the all-time high of 1985.
Closing Print Video: Ukraine, the S&P, and Thin to Win
As always, please use protective buy and sell stops when trading futures and options.
In Asia 10 of 11 markets closed higher: Shanghai Comp. +0.26%, Hang Seng +0.67%, Nikkei +0.83%.
In Europe 10 of 12 markets are trading higher: DAX +0.90%, FTSE +0.41%, MICEX +0.66%
Fair value: S&P -2.82, NASDAQ -0.58, DOW -30.12
Total volume: LOW: 855K ESU and 6.4K SPU traded
Economic and earnings calendar: Consumer Price Index, housing starts, Redbook and earnings from Home Depot (NYSE: HD), TJX Companies (NYSE: TJX), Medtronic (NYSE: MDT), and La-Z-Boy (NYSE: LZB).