In the old days, Friday's used to be the slowest day of the week. Traders taking the day off to go the the Hamptons, or just making the two-day weekend into a three-day weekend, but that’s not how it works today. With the introduction of the weekly options expiration, what used to be one of the slowest days of the week, has turned into one of the busiest days of the week. As we have always said, nothing stays the same in the world of futures and options trading.
With the exception of the early push higher, the S&P 500 futures (ESM16:CME) were weak all day. If you are following the PitBull trading rule about a low being made on the Thursday or Friday the week before the expiration, we have to point out that there are several occasions where the futures close out on a low on Friday afternoon, and rally on Monday and throughout the next week. That said, the sell off / weakness placed the future’s very close to being negative on the year again and brings back fears of the old adage ‘Sell in May and Walk Away,’ and also the beginning of the “worst 6 months for stocks”. Over the last 6 weeks the overall price action of the seems like the S&P will see bursts of buying, i.e. climaxes, followed by small let downs, but as the markets move into the summer trade we can not forget what happened at the end of July last year and the preceding China weakness. Sometimes the Sell in May does not occur until later in the summer, but we can not overlook how the markets acted last Friday. While the latest Commitments of Traders showed no change, the ISE exchange on Friday reported that traders bought twice as many put options as call options. So what are the markets signaling? The first part is we think less people are trading, and the ones that are trading are in defensive mode. After a 300 handle rally, the S&P futures the (ESM16:CME) stalled out above 2100.00 and is now nearing critical support at the 2029-2030 level. Its seems like the futures have lost momentum and the S&P cash study for the May options expiration shows a mix for the May expiration having returned 16 up 16 down weeks of the last 32 years.
Overnight the benchmark equity futures opened lower and traded down to 2035.00 in the first ten minutes of the globex session, down 7.50, handles before rallying up to 2049.25. That’s nearly a 15 handle recovery, before trading back to the 2042.00 area and is currently sitting at 2047.50 up four handles at 6:35 cst. The globex volume is under 140K at 6:40 cs,t and with the light economic calendar today, combined with “mutual fund Monday” and the idea that markets usually hold the PitBull’s pre-expiration week low, we lean toward higher prices today.
Heading into this mornings cash open it’s clear that the daily chart is breaking down. This week is the line of defense if buyers are going to turn this into a buy the dip opportunity, otherwise another leg lower this week will cause serious concerns for the charts, and for the first time since the February 11 low, bears will be firmly in control of the tape. Friday’s 2038.50, and last night’s 2035.00 lows, become the line in the sand and should be good for an initial bounce. However, once these are broken then we start looking at the 2030.50 low from May 6th and the April monthly low at 2026. There are clear levels that bears must work on to the downside before trading back to 2000. If the Euro session 2042.25 low does not hold today then we expect for some of these prices to be tested today and later in the week.
To the upside, 2049.25 is the first line of defense today for bears, and becomes an important risk marker. Depending on where the opening print is, this globex high could provide for a solid fade on first touch, but a retest is likely to produce higher prices looking at the 2054.75 Friday afternoon high, then 2063.50 the high print from Friday morning. If bears are going to fade a rally, they must look for a lower high around the 2060.00 area. Otherwise, with the low volume, expiration week and the tendency of the equity markets to run higher to make a monthly high during opex, any inch given to bulls could possibly result in their taking a mile of price action.
In Asia, 8 out of 11 markets closed higher -- Shanghai +0.84% -- and In Europe, 7 out of 12 markets are trading lower this morning (DAX +0.92%). The week ahead has a total of 17 economic reports, 8 T-bill or T=bond Auctions or Announcements, 3 Federal Reserve Bank Presidents speaking, the FOMC Minutes and the May options expiration. Today’s economic calendar includes the Empire State Mfg Survey, Housing Market Index and Neel Kashkari speaking from the fed.
Our view: It’s going to be interesting to see how this week plays out. It was a rough close on Friday but that doesn’t mean the ESM is going to tank. If the volume is low early in the week, it’s my feeling the futures will rally, but I have to admit that markets do not act all that well. It’s a sellers market right now and we have to see how today plays out. Fridays volume was the largest in several weeks with 1.86 million contracts traded.