Fear has always played its role in the S&P 500. From Somali militants attacking a Kenyan town to the continued fighting in the Ukraine to Pakistan launching a long-awaited ground offensive against the Taliban to the U.S. and Iran opening direct talks to counter the ISIS advances in Iraq, investors are struggling with how to digest the deluge of unsettling news that has been “shocking” the markets over the last few days.
There is a high level of anxiety in and around the markets right now, and this week is going to be a test of the S&P’s resolve. Will the S&P rally this week? Will the Pit Bull’s Thursday-Friday low the week before the June expiration hold? Can the S&P overcome all the negative global news?
While the VIX did jump late in the week, it seemed like Friday’s late rally in the S&P futures was trying to say something else. Like “Start looking ahead to next week’s June Quadruple Witching expiration.” There is a high level of global conflict in the news right now and we expect the news headline algos will be reacting in kind today.
But those are only the headlines and only part of the big picture. The market as a collective makes its decisions based on a lot more than headlines. Sometimes the market moves without an obvious explanation (though the explainers will still churn out their “analysis”). That’s why we repeat this like a mantra: “Trade what is happening, not what you think should be happening.”
The Asian markets closed mostly lower and in Europe 10 of 12 markets are trading modestly lower. This week’s economic schedule is light; there are only 3 Fed governors speaking, 15 economic releases and 10 T-bill or T-bond auctions or announcements.
The major scheduled event is the Federal Open Market Committee (FOMC) meeting, which starts Wednesday, where the FOMC is expected to continue its taper, reducing monthly asset purchases from $45 billon to $35 billion. The FOMC is expected to give a subdued but optimistic view of the economy, given the modest gains in employment, manufacturing, and housing numbers this quarter. It is the first meeting to include new Fed vice-chair Stanley Fischer, former head of the Bank of Israel, and two newly confirmed Fed governors.
As for today, there are no economic releases but we do have some Fed speak out of Palm Beach, Fla., from St Louis Fed President James Bullard on the economy and monetary policy. Also, Federal Reserve Gov. Daniel Tarullo speaks in Washington on corporate governance and Boston Fed President Eric Rosengren speaks to a Bank of Guatemala conference in Guatemala City on monetary policy.
Global flash points and uncertainty
Our view: After closing higher 9 days in a row, the E-mini S&P futures (CME:ESU14) sold off for 2 days and closed higher on Friday. The week has few economic reports but an abundance of global flash points. That said, there is also an abundance of positives:
- Mutual Fund Monday, which has been up 8 weeks in a row
- The S&P cash study for the June options expiration is positive every day this week but Wednesday
- The upcoming second quarter- and month-end rebalance.
As bad as last week’s drops may seem, both the Dow (^DJI:DJI) and S&P (CME:SPU14) fell less than 1% in their first weekly decline in a month. So how bad is it, really? The Dow is only 1.3% away from 17000 and the S&P is just 3.2% away from S&P 2000.
Our view is that despite the overseas unrest, we think the S&P will catch a bid this week and move back up. We also think the U.S. will do airstrikes in Iraq against ISIS. As the Iraqi army pushes back, crude oil will drop and the S&P will go back up. We lean to buying weakness using tight stops.
- In Asia, 6 of 11 markets closed lower: Shanghai Composite. +0.74%, Hang Seng -0.08%, Nikkei -1.09%.
- In Europe, 10 of 12 markets are trading lower: DAX -0.23% FTSE -0.24%
- Morning headline: “Global turmoil sends S&P futures lower ”
- Fair value: S&P -7.80 , NASDAQ -7.42 , Dow Jones -77.01
- Total volume: 939k ESU and 4.4k SPU traded
- Economic calendar: There are no economic releases today. St. Louis Fed President James Bullard speech on economy and monetary policy in Palm Beach, Fed Gov. Daniel Tarullo speech on corporate governance in Washington and Boston Fed President Eric Rosengren speech on monetary policy to Bank of Guatemala conference in Guatemala City.
- E-mini S&P 500 0.00N/A - N/A
- Crude 0.00N/A - N/A
- Shanghai Composite 2069.556-16.427 - -0.79%
- Hang Seng 23291-93.76 - -0.40%
- Nikkei 225 14966.79+33.5 - +0.22%
- DAX 9883.98-28.89 - -0.29%
- FTSE 100 6754.64-23.21 - -0.34%
- Euro 1.3563
