on May 2, 2024

Volatility Is Here to Stay for Now

Fed holds idea of “higher for longer”

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Our View

What’s the old saying, “The truth will set you free?” Well, it did yesterday when Fed Chair Jerome Powell said it would likely take longer than expected for the central bank to have confidence inflation is moving toward its 2% target.

But he also tried to cool down speculation that the Fed might need to raise rates again to fully control inflation. At the end of 2023, I was adamant that the Fed could not lower rates even though the market was pricing in 5-6 cuts in 2024. Now, the recent selloff is 100% tied to that.

It’s been a wake-up call for the public and the markets and guess what? The volatility is going to increase into the summer and into the fall elections.

Our Lean

May Day?

Stock returns tend to be better for investors who sell in May and return in November, but since 2000 the May-October period has been less volatile than the rest of the year.

I think the picture that’s being painted is one of increased volatility and yesterday was a great example. The ES was swinging 20 and 30 points in seconds. I have never seen so many -1,600 and +1,600 TICK readings in 2.5 hours in my career. These are not our father’s market or their charts.

As I have said many times, volatility is only going to increase into the summer and into the fall elections. And that brings me to the old trading adage “sell in May and walk away.”

The truth is that it used to work, but not as well as it used to. The trade is to sell in May and start going long in October. My gut tells me that while we may see some further letdowns in May and June, the ES isn’t going to go down much more. I think 5000.00, 4980, down to the low 4900’s would be an extreme.

Our Lean: We have a few economic reports and a ton of earnings today, highlighted with Apple after the close. And remember, tomorrow morning is jobs Friday. While I have seen some extreme movements, I do not think I have ever seen the ES move so much so fast. If the ES can get above 5087, I think it can go to 5103-5104 and possibly trade back up to yesterday’s high at 5126.75, which should be good resistance. However, if it does hold above there, then the next levels are 5136, 5146-to 5150, and 5165.

On the downside, if the ES starts breaking down under 5050, there is an enormous set of sell-stops under the 5043 level. That could start to target the 5000.00 level and look for a retest of the April 18 low at 4967. Now that the Fed meeting is out of the way, I think we could see a somewhat slower / less volatile trade in front of the May jobs report, which actually could be a good thing. My own gut feeling is you can buy the early pullbacks…

MrTopStep Levels:

How to use MTS levels

MiM and Daily Recap

ES Recap

The ES traded down to 5037.75 and opened Wednesday’s Fed-packed session at 5058.00. After the open, the ES traded 5055.75, rallied up to 5062.24 at 9:36, sold off down to 5044.50 at 10:00, chopped just above and below the VWAP, traded back down to the 5044.50 low, rallied up to the VWAP at 5052.25 and back-and-filled in a 5 to 7 point range. From there, the ES made a new high at 5054.75 at 10:28, traded 5049.00 and then rallied up to 5056.00, pulled back to 5050.75 and then rallied up to 5060.00 at 11:00.

After the high, the ES traded down to 5055.00, rallied up to a lower high at 5058.75 and sold off down to a new low by 1 tick at 5044.25, rallied back up to another lower high a 5058.00 at 11:47 and then sold off to another new low at 5042.25 at 12:02. The ES rallied up to 5055.25 at 12:31 and pulled back to the 5042.75 level at 1:17, rallied up to 5057.75, pulled back to 5050.00 at 1:46 and then back-and-filled above the VWAP for the next 15 minutes and then rallied up to a 5064.75 double top at 5064.75 at 2:01 and this is when the fun and games began as the Fed headlines just hit the tape.

The ES sold off down to 5051.50 at 2:02, rallied up to a new high at 5066.75 at 2:05, sold off down to 5052.00 at 2:11, did a sideways-to-up back-and-fill up to 5062.50, down-ticked to 5059.50 at 2:25, and then blasted up to 5075.75 at 2:30:57, sold off down to 5053.25 at 2:32 — a 22.5 point selloff in less than 2 minutes. After the low, the ES rallied up to 5077.00 at 2:35 and then dropped 21.25 points down to 5055.75 at 2:35:49 and then a huge buy program hit that pushed the futures up to 5114.25 at 2:45, a 58.50 point move in 9 minutes. From there, it dropped down to 5095.00 at 2:47:20 — a 19.25 point drop — and then rallied up to the high of the day at 5126.75 at 3:02, a 34.25 point rally in 15 minutes.

After a pullback, the ES rallied up to a lower high at 5121.25, pulled back to the 5110.25 level at 3:12, ground its way back up to a lower high at 5021.75 at 3:15 and then sold off down to 5099.00 at 3:22:42 in 16 minutes, rallied back up to another lower high at 5119.75 at 3:27:25 and it was the lower high that set off a ~52 point selloff all the way back down to 5068.00 at 3:39:43. The ES rallied back up to 5083.25 at 3:41, sold off down to 5068.50 at 3:44, rallied back up to 5084.50 at 3:46 and then sold off down to 5070.25 at 3:48:42, traded up to 5078.75 and traded 5046 on the 4:00 cash close and traded 5053.75 on the 5:00 futures close, down 13.75 points or -0.26%. The NQ settled at 17,474.75, down 96.50 points or -0.55% on the day.

In the end, it was a fairly quiet day before the Fed headlines hit, but then all hell broke out. In terms of the ES’s overall tone, it closed somewhat weak. In terms of the ES’s overall trade, volume was on the high side: 233k traded on Globex and 1.682 million traded on the day session for a total of 1.915 million contracts traded.

There were very few people saying the markets were going to go up — but not me. Here are some posts from the MTS chat early yesterday: