The S&P [SNP:^GSPC] took another hit Monday. From the jobs Friday new contract high print to yesterday’s low at 1834.50, the S&P is down 55+ handles. The S&P has fought gallantly this year, but as the markets close in on the end of the best 6 months for stocks (November to April), the old adage about selling in May and walking away may be a wake-up call for investors.
S&P net longs
After the 5-day decline and the 5-day rally back to new highs, overall positions in the S&P [CME:SPM14] shifted back to net long. While this may not seem out of the ordinary, Friday’s leap to new highs and the subsequent selloff shows just how fickle things have become in 2014. After a 180% rally from its March lows and last year’s 30% gain,z the S&P is lacking leadership and seeing selling in the market-leading stocks.
Widespread negative guidance
It always gets a little frosty leading up to the earnings season and 2014 could be out to prove a point. According to John Butters at FactSet, 93 out of the 111 companies in the S&P 500 that have issued an earnings outlook for the first quarter have guided below Wall Street’s consensus estimate. Butters said in a note on Monday that the the market actually has reacted positively to the negative preannouncements.
“For the 93 companies that have issued negative EPS guidance for Q1 2014 to date, the average price change (2 days before the guidance was issued through 2 days after the guidance was issued) was +0.2%,” he wrote.
Over the years we have seen this often and most of those companies end up meeting or beating expectations. But as we head into April and May we have genuine concerns about the longevity of the rally as stocks head into the seasonally weak period.
Not a good start
No one wants to admit it, but it’s been a rough trade so far this year. There have already been a few big false starts and there are a full 8 months left in the year. Like individual traders, traders at the big mutual funds and hedge funds do their best to hedge risk. Many of these firms have long stock portfolios that they try to “protect” when the stock market sells off. There are several ways the bigs employ these hedges. Some investment firms write options against long stock positions or sell futures as their hedge. When stocks are not making returns the investment firms and long-only funds get chopped up. As of yesterday’s close the S&P is now unchanged on the year, but that’s how it’s working for some of the big funds. After big returns of +14 to +20% last year, big firms like Fortress (-down 5.5%) to Paul Tudor Jones’s BVI Global (down -3.2%) to Louis Bacon’s Moore Capital Management (down -2.8%) are off to a slow start and looking for ways to recapture the 2013 magic.
Many are now saying that the gains are going to come later in the year, and that’s the feeling I am getting now. As we have always said, if the markets are going up, we want to go for the ride, and likewise on the downside. I said a few weeks ago that we are back to looking at some type of cheap S&P puts to buy and we still think that way. A retest of last week’s high would be a likely time to go shopping.
The Asian markets closed sharply higher (Shanghai Composite +1.92%, Hang Seng +0.98%), and in Europe 12 out of 12 markets are down. Today’s economic calendar starts with the NFIB Small Business Optimism Index, Redbook, JOLTS, Minneapolis Fed President Narayana Kocherlakota speech in Rochester, Minn., and Philadelphia Fed President Charles Plosser’s speech on prudential regulation in Philadelphia.
Our view: Is the current letdown in the S&P just another selloff after a fresh all-time high? Or is it the the start of a larger correction? One of these days the S&P is going to start going down and not stop. The question is when. Today Alcoa [AA] kicks off the earnings season and the number of companies in the S&P warning is increasing. Since Dec. 24 there have been 14 Tuesdays: 12 up, 2 down, with the two losing Tuesdays happening in March. It’s a very good but used-up stat. To be honest, we think today could go either way, but if the S&P rallies too early our question is, can the S&P hold?
Our recommendation: Don’t have an unshakeable opinion on today’s market direction. Don’t trade what you think the market should do. Trade what you see it doing.
Please join us for the April 10th webinar with MrTopStep’s Marlin Cobb (aka RedLionTrader) featuring the MiM (MrTopStep Imbalance meter) This will be a rare opportunity to hear from someone who not only designed the MIM but trades it everyday.
As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.
- In Asia,6 of 11 markets closed higher: Shanghai Comp. +1.92%, Hang Seng +0.98%, Nikkei -1.36%
- In Europe, 12 of 12 markets are trading lower: DAX -0.95%, FTSE -1.02%
- Morning headline:“ Global Markets Seen Lower Ahead of US Stock Open”
- S&P Fair Value: 1837.94 (futures 1.94 lower at 1836 as of 6:40AM CT)
- Total volume: 2.17M ESM and 5.7K SPM traded
- Economic calendar: NFIB Small Business Optimism Index, Redbook, JOLTS, Narayana Kocherlakota and Charles Plosser speak
- E-mini S&P 5001863.00-1.75 - -0.09%
- Crude103.36-0.24 - -0.23%
- Shanghai Composite0.00N/A - N/A
- Hang Seng23186.961+343.791 - +1.51%
- Nikkei 22514300.12+0.43 - +0.00%
- DAX9507.18+0.83 - +0.01%
- FTSE 1006652.56+16.95 - +0.26%
- Investment & Company Information