S&P 500 Chart
Sometimes the markets just go too far and yesterday’s trade was a perfect example of that. After making a 2191 high during Monday’s day session the S&P futures (ESU16:CME) sold off late in the day, traded lower on Globex, and sold off after yesterday’s 8:30 CT cash open.
As the S&P futures approach the ‘big figure’ at 2200.00 traders may want to consider taking some profits. After a 10% rally from the Brexit low the Dow futures (YMU16:CBOT), the S&P futures (ESU16:CME), and the Nasdaq 100 Futures (NQU16:CME) are all trading at 19 year highs.
While MrTopStep disagrees with many of the market timers calls for a 60% correction we do think that it’s important to recognize how far the markets have gone. We also think it’s important to remember not to get overly bullish at such a critical level.
Crude oil got a jolt on the upside Monday when Saudi Arabia and Russia agreed to possible production cuts pushing oil up to $46.73. This is a big flip flop from just a few weeks ago when the trade was to be short oil and long the S&P. It shows how quickly the big investment and mutual funds switch gears.
Crude Oil Chart
There have only been a few down days over the past several weeks and we think the selling is a healthy sign. In the MrTopStep forum I posted that I thought we could see a few days of down trade and start to go back up Thursday and Friday.
Over the last few weeks, the weakness has been early in the week, and there has been strength later in the week that leads to new highs. For eight sessions now, the ESU has been up a day then down a day, not closing consecutive days in the same direction.
Yesterday was the second worst performing day for the S&P 500 futures since the Monday June 27th low. That’s very telling of the slow grinding strength that has been in equities markets for nearly two months now, and there is no reason to think that there will be any serious selling until after the expiration week at least.
Every time the ESU pulls back 10 handles bears get excited, but until this index proves something from the bearish side, the dip buyers will continue to rally the markets to new all time highs. All this price action leaves us in between, unable to step in and call a market top and short new highs, but at the same time unwilling to buy a new all time high.
Overnight Asian and European markets were mostly weak. The ESU was unable to be lifted by early European buyers which seemed to be a break from the norm. T
he benchmark future did grind up to 2181 going into the European open, but was then spanked down to 2173.50 in just one hour, and is currently trading unchanged at 2176.75. Both the range and volume have picked up in globex, and even with yesterday’s 10 handle loss, volume was still just a hair shy of 1.4 million.
Heading into today’s session the crude oil number will be the early event. Inventories could always move crude, and in turn the S&P, but also in the afternoon the feature headline will be the FOMC minutes.
MrTopStep believes that there is nothing meaningful that can come from this. The Fed keeps beating the drum, but no one is paying attention anymore, and there isn’t anything they will say that will change anything. The Fed Fund Rate futures are showing a 15% chance of a hike in Sept and October and doesn’t favor a hike until March of 2017.
One thing that is important for the Fed is to not catch the market off guard. If they do think they will raise rates this fall then their language better start reflecting this. We cap it off today looking at some bank comments going into the FOMC minutes.
Banks and Rate Hikes
BNP Paribas (PA:BNPP): Our economists point out that this year the minutes have often been interpreted differently from the post-meeting statement. While the market had a relatively muted reaction to the July statement, we think the minutes could guide the market to price in a greater chance of a September rate hike. We continue to think this should be priced closer to 60-65% than the current 20% implied by rates markets.
RBS (LON:RBS): In our view, the tone of the policy debate won’t change all that much after the release of the FOMC minutes from the July 26-27 meeting. Consistent with the Fed statement, we do not expect the minutes to contain material surprises. However, the minutes could flesh out some details on officials’ decision to reintroduce language around risks. The July FOMC statement noted “near-term risks to the economic outlook have diminished.” At the margin, we believe this marks a small step in the sequencing of language used ahead of a rate hike. In our opinion, discussion here would probably be one of the most interesting aspects of the minutes.
BofA Merrill: Overall, we think the minutes will sound slightly more hawkish than the statement as Fed officials emphasize that downside risks have abated and that the US data have generally been supportive of continued growth in the economy. But the minutes are unlikely to imply an imminent hike. The knee-jerk reaction could see the USD strengthen as this will be viewed on the hawkish side given the USD selloff we have seen since the NFP report. But, a failure by the Fed to signal hikes are imminent and/or a more protracted normalization cycle means the FX market impact is likely to be short-lived.
In Asia, 6 out of 11 markets closed lower (Nikkei +0.90%), and in Europe 12 out of 12 markets are trading lower this morning (DAX -0.87%). Today’s economic calendar includes the Bank Reserve Settlement, MBA Mortgage Applications, Atlanta Fed Business Inflation Expectations, EIA Petroleum Status Report, James Bullard Speaks, and the FOMC Minutes.
Our view: There will always be a lot of reasons for not liking the markets but none of it seems to matter. Global central bank quantitative easing is greasing the upside wheel. Over the course of the last few months getting back to back down days has been hard to do, but maybe the Fed minutes will change that. Yesterday the DAX was down and the ESU followed, but this morning the DAX is down almost 1% but the ES is up 1 handle. My gut tells me we could see some more weakness this morning then start going back up. The largest open interest in the S&P options is at the 2200 line and I still think they make a run for that this week. Down Tuesday, down a little today, and then start going back up. Our view, sell the early rallies and buy weakness… ES 2200 by Friday.