A lower-than-expected December retail sales number, a -6.6% drop in JP Morgan’s profits, a continued decline in commodities prices (copper down 13 cents) all spelled one thing: growth concerns. Oil prices saw their largest jump in 2-1/2 years yesterday as a giant “short squeeze” turned into an extended rally. Crude oil futures (CLG15:NYM) rebounded from a nearly six-year low as traders turned away from the bearish pressures of a worldwide glut to cover themselves on expiring options.
The start of earnings reports this week has shown trouble in the financial sector added to the already expected weakness in energies. JPMorgan, which earlier paid a $1 billion fine over its conduct of foreign exchange trading, had over $1 billion in legal fees cutting into its profits, a number which continues to grow. JPMorgan CEO Jamie Dimon told reporters banks were “under assault” by regulators. JPM posted fourth quarter revenue on a managed basis of $23.64 billion. Wells Fargo, the nation’s largest mortgage lender, reported a drop in lending just as JPMorgan did. However, Wells Fargo reported a slight increase in profits in the fourth quarter.
In a week full of news that can cause market reactions, a 0.9 percent drop in December retail sales came out before yesterday’s open. Part of this was the drop in gasoline sales revenue. But Bloomberg points out that with consumer confidence and discretionary income both up, “it is possible that more money is going to services which do not show up in the retail sales report.” That means that the economy is not weakening; people are just spending their money on other things.
Volatility jumps
Many traders and analysts are starting to think that the rise in volatility shows the nearly six-year rally in U.S. stocks has reached a “fragile stage” reflecting an uncertainty over the economic outlook and stretched-out valuation multiples. So far the earnings have showed mixed results, but as the earning season moves forward we think the results will improve. The jump in volatility is being seen in the stock market, but it’s also showing up big in the commodity sector. The result of all the increased volume has been giant uptick in algorithmic and program trading. While our trading desk on the CME floor in the S&P has been part of every major stock market even since 1985′, we have to admit that we seriously have never seen the S&P futures move up and down as they have in the first two weeks of December.
The story about the BATS exchange getting fined $14 million for giving trading advantages to certain high-frequency trading firms shows how “rigged” the futures and options area has become. Additionally, we think there are a lot fewer “retail” traders in the markets and a big increase in HFT trading. The story also is another reminder that while the exchanges say they want to make it a more level playing field, we as traders must understand that with 80% of the volume coming from some form of program trading, there is no way the exchanges are going to throw out their largest customers.
The jump in volatility is not going to change anytime soon and at the end of the day we wonder when the next flash crash is coming. We do not believe it was a singular event.
ECB meeting next week
The next big hurdle traders are looking at is next week’s ECB meeting. Traders and investors are hoping the European Central Bank will push forward with the plan to start buying sovereign bonds.
In Asia 8 of 11 markets quoted closed higher and in Europe 7 out of 12 markets are trading higher this morning. Today’s economic calendar starts with jobless claims, PPI-FD, Empire State mfg. survey, Philadelphia Fed survey, EIA natural gas report, 3- and 6-month T-bill announcement, 10-year TIPS announcement, Fed balance sheet, money supply and earnings from Bank of America (NYSE: BAC), Intel (NASDAQ: INTC), Citigroup (NYSE: C), Schlumberger (NYSE: SLB), and Taiwan Semiconductor Manufacturing (NYSE: TSM).
Algos going nuts
Our view: The S&P (^GSPC:SNP) has been down 8 out the last 10 trading days. The E-mini futures (ESH15:CME) traded up to 2051 on Tuesday and sold off down to 1981 yesterday, a 70-handle selloff. Again, I have to ask, is this normal? On Globex last night the ESH15 traded as high at 2027.25 and as low 1986.00, that is a 31.25 range and is 2003.00, down 4.5 handles at 7:00 am CT. Crude futures (CLG15:NYM) traded up to $50.00s, sold off down to $47.71 and traded back up to $49.81 and is trading $49.51. There is no doubt that the algos have gone universal.
The ESH15 has been down 4 in a row or down 8 out of the last 10 sessions and the repeated failures of the rallies are really starting to wear on the S&P. Our view is to trade the Globex ranges –if the ES gets up to 2026-2028 we want to sell the rally and if the ES gets down to 1986 to 1988 we lean to buying the weakness.
Dec 31 -24.3
Jan 2 -6.1
Jan 5 -30.4
Jan 6 -21.5
Jan 7 +25.2
Jan 8 +35.4
Jan 9 -19.7
Jan 12 -12.9
Jan 13 -6.3
Jan 14 -8.6
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As always, please use protective buy and sell stops when trading futures and options.
- In Asia 8 of 11 markets closed higher: Shanghai Comp. +3.54%, Hang Seng -0.99%, Nikkei +1.86%
- Europe 7 of 12 markets are trading higher: DAX +1.10%, FTSE +0.73%, MICEX +1.13%, GD.AT -0.74%
- Fair value: S&P -6.42 , NASDAQ -6.73, Dow -71.14
- Total volume: 2.5mil ESH and 8.3k SPH traded
- Economic schedule: Jobless claims, PPI-FD, Empire State mfg. survey, Philadelphia Fed survey, EIA natural gas report, 3- and 6-month T-bill announcement, 10-year TIPS announcement, Fed balance sheet, money supply and earnings from Bank of America (NYSE: BAC), Intel (NASDAQ: INTC), Citigroup (NYSE: C), Schlumberger (NYSE: SLB), and Taiwan Semiconductor Manufacturing (NYSE: TSM).
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