The S&P 500 futures (ESU14.CME) rebounded yesterday after a two-day, 17.2-point selloff. Investors were reassured by the Federal Reserve’s June minutes that the Fed does not plan to raise interest rates anytime soon. The S&P futures closed up 6.80 handles at 1967.20.
However, early this morning, around 3 AM ET, the market reacted sharply to comments St. Louis Fed president James Bullard made yesterday that the central bank may raise interest rates sooner than investors expect. The S&P futures dropped as low as 1947.50 and are trading around 1950 as of 7 AM CT, down nearly 0.9% from yesterday’s close.
We have been calling for a Thursday/Friday low before the week of expiration—a MrTopStep Trading Rule learned from our friend Marty “PitBull” Schwartz. This early drop may well be it, though we caution against picking the bottom.
Zero rates
Most traders interpreted the minutes as the Fed would continue to taper and cease its bond-buying program after its October 2014 meeting. There was still no consensus among Fed officials on how they would raise rates and there was no rush to do it. The general expectation is that the Fed will start to raise borrowing costs sometime next year.
While they say the markets love Janet Yellen, we think the markets like zero rates better. Bond futures also took the Fed minutes positively with the futures going on the highs of the days at 136.21, up 12. There is a scene out there that the Fed will continue to be “patient” and that rates won’t move up until late 2015.
Price action: The song remains the same
The overall price action of the stock market remains unchanged. Last week several big names again came out warning of a potential stock market selloff / correction and indeed the S&P did sell off for two days, but like all selloffs it was short-lived.
Yes, I remain a bull, but until there is an actual sea change we see no reason to do anything other than what we have been telling people for a very long time: let the S&P make a high, pull back, drag the short sellers back in (Tuesdays ESU14 volume was high, 1.77mil) wait for a little back-and-fill price action and then jump back in on the long side. The other part of this equation is earnings continue to grow.
The Asian markets closed mostly higher and In Europe 12 out of 12 markets are lower. This morning’s economic schedule starts with the chain store sales number, jobless claims, wholesale trade, EIA natural gas report, 30-year bond auction, Kansas City Fed president Esther George’s speech on economy and monetary policy in Shawnee, Okla., Federal Reserve Vice Chair Stanley Fischer’s speech on financial sector reform to the NBER conference in Cambridge, Mass., and earnings from Progressive Corporation (PGR), PriceSmart (PSMT), and Family Dollar Stores (FDO), which just reported that it will not meet analysts’ expectations.