The Asian markets closed modestly higher and Europe is trading mixed to slightly higher. Yesterday the S&P did exactly what it did on Monday: opened higher, pulled back a little, then ripped higher. In this “thin to win” trading environment, the only buying we are seeing is the short sellers covering. There is no new buying. Today we have another light economic schedule.
One of the desks we talk to in the interest rates said a few days ago that treasuries have priced in the “slowing” of the Fed’s asset purchases and 10-year yields will end the year at 3%. If anything has been clear in the interest rate market, it’s that even after a bounce, they go right back down. Every attempt to be a buyer is short-lived.
[pullquote]It means that the Fed has no intention of pulling the rug out from under its bond purchases. It also means that the folks who sold stocks or the S&P too early are going to have to pay the price.[/pullquote]According to Bloomberg, the median estimate for next week’s FOMC meeting is that the Fed will slow its monthly buying to $75bil from its current $85bil. The 10-year yield has moved up 48 basis points since June 30 to 2.97% after reaching a two-year high at 3.01% after last Friday’s jobs report. During next week’s two-day meeting the Fed is expected to reduce monthly Treasury purchases to $35 billion from $45 billion and maintain mortgage-bond buying at $40 billion.
So what’s that mean? It means that the Fed has no intention of pulling the rug out from under its bond purchases. It also mean that the folks who sold stocks or the S&P too early are going to have to pay the price. I never thought that the Fed would just yank the program, and the way it looks now is they are going to “ease” out of the program and have the ability to extend it for as long as they see fit. The current rally in the S&P is another good example of what happens when everyone thinks the same thing.
The S&P futures have closed higher 7 out of the last 9 days. As it did on the downside, the S&P will get overextended at some point. Are we there yet? It’s hard to tell, but if the same price action exists today as it has all week, the ESU could be heading back to the big figure at 1700.
I do not know why, but there is a clear absence of hedge fund, bank and proprietary trading desk trading right now. Sure the option markets are still trading, but the rest of the crowd seems to be going slow since the Labor Day holiday.
It could have something to do with trying to hold on to gains that many hedge funds saw earlier in the year. In fact, there’s no doubt about it. At 6:00 am the S&P has gone from up .75 handles to down .25 handles, the range is a measly 4.25 handles from 1684 to 1679.75 with 110k contracts traded. You can almost hear crickets.
Our view is to sell the early rally and buy weakness. True, we often recommend that (and get proven right most of the time). But the trick is in the timing. This isn’t a set-it-and-forget-it trade. The rally doesn’t happen on a fixed schedule and weakness is in the eye of the beholder. The key for individual traders is to go in with targets and a definite exit strategy.
The first resistance should come in at the Globex 1684 high, but be forewarned that there are still a lot of buy stops above that level.
MiM: The MiM has worked well lately. The reason is simple: higher volumes! Yesterday the MiM started showing 75% buyside and over $170mil to buy. Then it flipped to the sell side and ended up $382mil to sell.
The ESU sold off a little, then bounced back up on the close. If you are wondering why the S&P rallied after the imbalance, the answer is very simple. The broader market imbalance to sell $382mil does not stop accounts that have S&Ps to buy from continuing their buying. And the selloff gave them some attractive prices.
Ned Davis S&P Cash Study
Don’t forget to look for the Pit Bull’s Thursday-Friday low, and complementing that idea is the Ned Davis S&P cash study for the September quadruple witching http://mrtopstep.com/2013/09/expiration-study-september-2013/
As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.
- In Asia, 7 of 11 markets closed higher: Hang Seng -0.17%, Shanghai Comp. +0.15%, Nikkei +0.01%.
- In Europe, 8 out of 12 markets are trading higher: DAX +0.45%, FTSE +0.12%.
- Morning headline: U.S. Stock-Index Futures Little Changed After Syria Delay
- Total volume: 1.85 million ESU and 11.7k SPU
- Economic calendar: MBA purchase applications, wholesale trade, EIA petroleum status (API) and a 10-year note auction
- MrTopStep Closing Print Video