When we woke up yesterday, Asia and Europe were down sharply across the board. Overnight the SPM (e-mini S&P) sold off hard with the EU bailout of Cyprus front and center. With the S&P trading above 1550, up over 9.5% and up 9 of the first trading days of March, and the SPM down 23 handles from Friday's close, things were not getting off to a very good start.
So what happened? There are probably hundreds of speculations about why the S&P did not go down after the Cyprus news, but this explanation is the correct one.
First, it shouldn't be a surprise to anyone that Cyprus is in trouble. Over two years ago when places like Spain and Ireland were being called out as possible financial hotspots, Cyprus was high on the list. What this bring into play is the possibility of spread to other Eurozone countries. It is a form of economic dominoes -- when one goes, others will follow.
The news had the S&P futures down 22 handles during Sunday night’s Globex trading session but opening only 12 handles lower on the 8:30 bell. With the S&P nearing its all-time high, a weak March quadruple witching expiration and the news out of Cyprus pushed the bears back into sell mode with over 520k ESM S&P e-mini futures trading before yesterday’s 8:30 open. Clearly the sellers came out in force. The bears were licking their chops, but the buyers had a different game plan. After opening sharply lower at the 1538.20 to 1539.00 and making a 1538.00 low, the ESM went into autopilot to the upside.
So why the false start? There are two reasons and they work together. The first is very similar to our Counter-Trend Friday trading rule (see MrTopStep Trading Rules 101) that kicks in when the S&P gaps sharply higher or lower with what we call “oversized” pre-open ES volume of 400k to 500k contracts traded. When the ES sells off so much on such high volume, it means that customers sold at low prices. In doing so they place buy stops above in the ESM. People can downplay the algorithms as much as they like, but in selling off sharply the ESM hit a lot of sell stops on the way down and once the ESM opened well above the lows the algorithms started probing the upside with small buy orders. Once the ESM started to short cover, the buy stops lifted the offers in the ESM (s) that make up an index arbitrage buy program. Once it was in motion there was no stopping it.
In the end the robots one-upped the bad news out of Cyprus with a good old computerized buy program.
Our view: Some very smart market timers are saying the rally is near an exhaustion point, that the buyers are fully vested, selling and raising cash and waiting for a correction to start buying at lower prices. Up 10% to 12% in 11 weeks is a good reason to take some profits, but we still do not think the rally is over. Could the ESM see a retest of the Sunday / Monday Globex lows? Sure it could, but at the end of the day there are still 9 trading days left in the quarter and T+3. Our view is to sell the early rally and buy weakness. As always, keep an eye on the 10-handle rule and please use stops.
It’s 7:15 a.m. and the ESM is trading 1549.75, up 3 handles; crude is up 24 cents at 93.98; and the euro is flat at 1.2956.
In Asia, 8 out of 11 markets closed higher (Shanghai Comp. + 0.78%, Hang Seng -0.19%).
In Europe, 10 out of 12 markets are trading lower (CAC -0.95%, DAX -0.53%).
Today’s headline: S&P Seen Higher Ahead of Cyprus Vote
Total volume: 2.2mil ESM and 8k SPM traded.
Fair value: S&P +5.10, NASDAQ +10.70
Economic calendar: Housing starts, FOMC mtg begins, Obama in Israel and earnings from DSW, Adobe Systems, Cintas, Williams-Sonoma and Francesca Holdings
MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/latest-you-tube-videos/danny-riley-closing-print/video/latest/closing-print-3-18-2013Danny 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.
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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.