S&P 500 Futures: Central Banks No Help With This Trading Range

Danny Riley

Sat, Aug 6, 2016, 11:00 AM

Central Banks are at it again and the Fed is perhaps more unclear than ever. We have been hearing this story for the two years, a constant signaling that rates are going higher, but only one rate hike during that time. Earlier this year Fed members were touting that there was a definite hike this year and the likelihood for two hikes before year’s end. Here we are, with three Fed meetings left in the year, and no clarity on the matter. Although the Fed seemed more hawkish than the last couple meetings, overall, to me, the tone seems more dovish than earlier this year.

It’s telling that only a single member voted for a rate hike. Chair Yellen is willing to do anything to bring surprise to the market. Currently the Fed Fund rate futures are not pricing in a rate hike until this time next year. So she and her governors are going to have to begin to beat the drums loud and hard to change the market view. They are hoping that all economic indicators continue to remain stable and that there is no serious equity relapse this fall. They’re also hoping there are no systemic problems around the world to be able to swing FOMC votes to approve a rate hike and prepare the market for such news.

Tonight, the Bank of Japan will be meeting and the expectation is that monetary stimulus will be expanded. The last time(s) this has been done, it has led to an equity rally, particularly in the S&P 500. It seems like if the FOMC is unable to break this current range, the BOJ may be the ones to do it.

We could go on about the trading range yesterday, but it has been more of the same that we have already said this week. There tends to be a buy area in the ESU16 at 2155 and a resistance area at 2165. The reactions to the Fed were for the most part contained to this area on a “quiet” Fed day. Overnight, global equity markets were fractionally weaker and the S&P 500 futures traded in a quiet range for much of the night but then sprung up to 2168.50 shortly after the Euro open. Since then the ES has been offered down to 2159.25, three ticks shy of a 10 handle move on 150K volume at 6:15 am cst, and is currently trading five tick above that low at 2160.50. Once more, rejection above 2165. Today’s calendar is worth noting, however, if the Fed could not extend this range, I’m not confident that anything on today’s calendar can.

End of the Month Rebalancing

In yesterday’s Opening Print we noted that the three day accumulation of market-on-close (MOC) imbalances had totaled nearly $2.5 billion dollars. While it looked like some money flow was coming into the market the S&P 500 was unable to make new high prints during the cash session.

Yesterday, the MOC turned negative by $1.2 billion dollars, as what had flowed into equities started to flow out. In the ESU16 the cumulative delta, which indicates the transactions at the ask price minus the transactions on the bid price, showed very strong selling into the close as traders were strongly net sellers on the day.

Last week I began to note the PitBull talking how the third week of earnings, combined with the last week of July, begins to see some topping formation. Looking at the volume analysis from yesterday I began to wonder if the benchmark equity index was beginning to top out. I realize that this week is the end of July monthly rebalancing, and after all the buying that occurred this month, it makes sense for some profit taking into the month’s close. As traders remember last years dreadful August, and the typical seasonals do not favor this time of year, or look too highly at new highs made at this time of year, I wonder if some serious money is starting to go off the table.

Let’s face it, the last two years have been very tough, particularly for money managers. Right now, it is likely that many of the institutional and mutual fund managers are at the most profitable level for the year after many of them failed last year. When they are up, the temptation exists to lock in some profit and secure some bonus for the year, or at least make it less of a fight to close the year.

I was talking to an acquaintance yesterday that many may label a “perma bear,” as he has been shorting every new high this year, and seems to add to his shorts daily. He finally went long and I couldn’t believe my ears. To me this had warning signs all over it. when the perma bears finally throw in the towel, how much more upside could exists? I even heard Tom Lee, who is respected by some people that I respect, last week on Bloomberg say that “conditions were ripe for a 8-10% gain,” then go on CNBC this week saying that “August scares us”. Last year I made a call for 2175 and 2200 and I may get it, albeit a year late, but I think that this is an ideal time to add portfolio protection in the form of index puts.

In Asia, 6 out of 11 markets closed lower (Nikkei -1.13%), and In Europe 10 out of 12 markets are trading lower this morning (DAX -0.06%). Today’s economic calendar includes Weekly Bill Settlement, International Trade in Goods, Jobless Claims, Bloomberg Consumer Comfort Index, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, a 3-Month Bill Announcement, a 6-Month Bill Announcement, a 7-Yr Note Auction, Fed Balance Sheet and Money Supply.

Our View: At this point, more of the same buying at 2160-2155 has been working, and selling at 2165-70 has been working. Once we all get too comfortable with this they will pull the rug out from under our feet. I think today leans toward selling. Already the ES is breaking down, and if the 2155 area breaks and turns into resistance then we are looking at the minimal 10 handles below that, and then my 40 handles below 2160. Our view is to buy weakness and sell the rallies. I get the feeling the 2172.50 high could be it for a while. I also think we could see CL go up a little.

As always, please use protective buy and sell stops when trading futures and options.