The S&P is on a record track, but with a full 11 months left in the year and the likelihood that sequestration spending cuts will go into effect in March, how much further can the markets go? One way investors keep an eye on the stocks or mutual funds they hold is by following the daily movement of the S&P 500. When there are big fluctuations like the 1987 crash, they say things like "it was the S&P's fault." If you add in the last day of the year's gain to present, the ESH (mini S&P) has rallied 112 handles in just 16 trading days.The big question is with record inflows of new money going into the stock market and $200bil in fiscal tightening and tax hikes coming, are people too optimistic? Has the bus gotten too full?
Influence of the imbalances: One of the trademarks of the current rally has been the constant opening and closing buy imbalances. For most of December's trade the imbalances were mixed to the sell side, but once the fiscal cliff deal was reached the buy imbalances started to roll in. Additionally the size of some of the imbalances has been notably large. These imbalances combined with the lower volumes made for a perfect storm to the upside. Now they are backing off. In the last few days the Dow 30 imbalances have shifted from a buy-side bias to a slight sell. Some of the broader market imbalances have also shifted from the multi-billion-dollar buys to yesterday's $260mil buy.
While the Dow closed higher for its fifth day in a row yesterday and the S&P closed up seven in a row, the NASDAQ buckled under the weight of Apple as the stock declined to an 11-month low. The S&P 500 index (SPX) traded up to an intraday high of 1,502.28 and settled at 1495, closing up less than one point. The last time the SPX closed above 1500 was on Dec. 10, 2007. The S&P 500 future (ESH) made a new intraday high at 1497.75 and settled at 1491.80 on the futures close, up 1.5 handles. The NASDAQ closed down 23.29 points or 0.74% while the NQH (mini Nasdaq future) high came in at 2743.00 and settled at 27.18.25, down 40.75 points.
Mushy Apple: Yesterday [AAPL] was down 12% to its lowest level in 11 months after the tech-heavyweight reported revenue well below expectations. Terry Sandven, chief U.S. equity strategist with U.S. Bank Wealth Management, was quoted as saying opinion "has soured on the name, and the stock price reflects that." The extreme decline showed up the most in the tech-heavy NASDAQ, where AAPL's weighting is far larger than in the S&P 500.
With AAPL turning south, the S&P testing 1500 in just the first 16 days of 2013 and some of the big buy imbalances backing off, one has to wonder if the markets are not getting ready for some type of letdown. Of the 16 trading days so far this year, the S&P has closed higher 12 times and has closed higher 7 days in a row!
Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.
Our view: Asia and Europe are both up and we have a very light economic calendar. Right now fighting City Hall is not working. We are sticking to the "sell the early rally and buy the weakness" trade. The higher we go, the more risk there is of a letdown, but the power mechanics aren't letting up yet. We feel confident that when the markets do start to roll over we will know it. As always, keep an eye on the 10-handle rule and please use stops when trading futures.
- It's 7:15 a.m. and the ESH is trading 1495.50, up 3.75 handles; crude is up 31 cents at 96.26; and the euro is trading 1.3458, up 80 pips.
- In Asia, 7 out of 11 markets closed higher (Shanghai Comp. -0.49%, Hang Seng -0.08%).
- In Europe, 9 out of 11 markets are trading higher (CAC +0.66%, DAX +1.16%).
- Today's headline: "Stock futures up as P&G reports higher earnings"
- Total volume: 1.82mil ESH and 15k SPH traded
- Fair value: S&P +7.18, NASDAQ +13.32
- Economic calendar: New home sales; earnings from P&G, Halliburton, Honeywell, Oshkosh, Kimberly-Clark
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