The S&P futures were down 2.5 handles at 6:00am Friday morning, and then dropped over 10 handles (points), as the German DAX dropped over -1.5% the S&P’s sold off down to a new low at 2349.50.
On Friday mornings 8:30 CT futures open the (ESH17:CME) traded 2352.25. The weakness in the Nasdaq 100 futures (NQH17:CME) was the culprit during Thursday’s decline, but late in the day the index markets ‘short covered’ and that price action was repeated during Friday’s ‘late day rip.’
Several years ago I notices how the S&P would rally sharply late in the day on Fridays. This phenomenon lasted for a few months and then disappeared, but there have been many examples, just not as pronounced. Now Tyler from Zero Hedge has ‘finally’ caught on and tries to give his explanation of whay it happens ( http://www.zerohedge.com/news/2017-02-25/jpm-explains-what-causes-markets-330pm-ramp ).
I do not know who Andrew Brenner, head of international fixed income for National Alliance Capital Markets is, but both he and Tyler are late to the party, and I do not believe it has anything to do with Trump’s speech tomorrow. It is all about how the ETFs and mutual funds add or buy stocks late in the day. We call it ‘the guys with the better seats’ that show up late in the day. It also has something to do with our ‘3 parts to the trading day.’
Part 1 is what happens on Globex, Part 2 is what happens after the 8:30 ct futures open, and Part 3 is what happens after 2:00 when the guys with the better seats show up (MOCs and imbalances). I asked several times in both the MrTopStep forum, and on the Twitter feeds, if traders thought the weakness was going to continue or was the recent sell off just another good example of getting traders excited about a potential top in the market and then catch everyone off base and rally? Clearly Friday’s chart in the ES shows from 9:00 to 2:00 a gigantic back and fill pattern that led 7 to 8 handle rally going into the close.
I know traders want to be part of the sell off when the futures actually do turn around. Maybe it will start Tuesday when President Trump does his first state of the union address, when he is set to announce some of his initiatives, but I am starting to wonder if the S&P keeps going higher. Over the weekend, Warren Buffett said the stock market is ‘virtually ‘certain’ to be worth far more.
Look, I know the rally is defying conventional wisdom, but there is nothing conventional about the current state of affairs. Is the rally really being ruled by the new president, or did he inherit the office as the economy started to heat up? I personally think it’s both, but I also think that while part of the US public doesn’t like what they see out of the new president, the global institutional investor does. Money is pouring back into the US stock markets, and I am not sure whats going to stop it. I will say one thing, I am very interested in the State of the Union address and how it’s all going to play out.
In the end, my fellow traders, it is what it is. The (ESH17:CME) overall price action has not changed a bit. Over the last 20 days the ESH has closed higher 13 times. And on the rare occasion that the futures do sell off there is always the late day rip, or part 3 of the trading session. That being said, while stocks have been remarkably resilient, the political narrative is quietly shifting, as stocks look more towards Congress instead of Trump (see below). Key pieces of the months-long stock rally are exhibiting signs of vulnerability (the SOX was a notable example this week while the BKX could be next). Treasuries have rallied, with 10yr yields hitting a YTD low on Friday – if this price action persists the BKX will begin to take more notice and could suffer further as a result. No one promised us a rose garden traders and this week my be a very good test of just that !
While You Were Sleeping
Overnight, equity markets in Asia traded in a risk off tone as all the majors were moderately lower, followed by a European session that has been very choppy and mixed. The S&P 500 futures opened the overnight session at 2362.75 and traded a tick lower before pushing up to to a new all time high at 2370 early in the Asian session, and has since traded off those highs down to 2363.50. At 6:16 am cst has last printed 2364.50, down two ticks on the day, with volume at 150k.
In Asia, 9 out of 10 open markets closed lower (Nikkei -0.91%), and in Europe 6 out of 10 open markets are trading lower this morning (DAX +0.17%). This week has a high level of economic reports, 26 in all, 10 T-bill or T-bond auctions or announcements, 8 Federal Reserve banks presidents speaking and Janet Yellen speaking at the Executives Club in Chicago on Friday. Today’s economic calendar includes Durable Goods Orders, Pending Home Sales Index, Dallas Fed Mfg Survey, Robert Kaplan Speaks, a 4-Week Bill Announcement, a 3-Month Bill Auction, and a 6-Month Bill Auction.
Our View
There is an old song that the PitBull used to sing to me and it’s called ‘Take out the sell stops, take out the buy stops’. I have to ask you… why is every major event always a sell when the future’s always end up ripping higher? I started asking if this was a real sell off or just another downside ‘false start?’ To me that’s what it’s looking like the latter.
Three weeks ago a fellow trader emailed me and said that there would be a top made when President Trump does the State of the Union address, or when he announces his tax cut plan, but I am starting to think it’s all going to be one big fade job, and that the ES is going to move higher this week. Our view is, you can sell the early rallies and buy weakness, or just go with the trend and buy it when the ES goes down. And lastly… Keep an eye on the 10 handle rule.
PITBULL Levels: clj osc 2/1 turns up on a close above 5380, esh osc 21/21 turns up on a close above 338497, vix osc 3/1 turns up on a close above 1240.
As always, please use protective buy and sell stops when trading futures and options.