S&P 500 FUTURES: DO IMBALANCES TELL A STORY

MrTopStep.com

Mutual Fund Monday used to be one of our favored buy days, but over the last year and a half it has turned into one of the slowest, lowest-volume, down days of the week.

While some people may not believe or follow the buy and sell imbalance, overlooking it this year has been a mistake. Going into the final day of the year and the first four trading days of the new year, total buy imbalances added up to almost $6bil on the buy side. We do not monitor all the different imbalances, but when you see several back-to-back days of buying $1bil to $1.5bil a day in the broader market, it’s safe to assume that there were other buy imbalances in other indices.

With the year off to such a good start and new money pouring into stock funds at the fastest pace since 2007, it’s difficult to think that the markets could go anywhere but up. With volatility so low, I personally have heard several locals say that when it’s like this all you have to do is buy any 8-handle pullback -- meaning even the locals in the pit have become complacent.

At the end of last year most thought the S&P futures were going to collapse under the weight of the fiscal cliff, but now that the public has gotten past that idea they are piling into stocks at the fastest rate in five years. Do I think we sell off in January? No, I don't, but there has always been a feeling that the public comes storming in late to the stock party. In fact, fund flows actually can be a contrarian indicator. Nevertheless, all the recent buying has been supporting the markets. With Treasurys not supplying the returns investors are looking for, it’s all going into stocks.

While the markets may not be in the same position they were in on Aug. 8, 2011, when the VIX shot up to 48, there was a prolonged jump in volatility that kept the VIX above 30 until mid-December. I remember this well because the Pit Bull went from losing $13mil to nearly $25mil during the period. As they say, when the VIX goes down the risk goes up.

In conclusion, the markets are acting fine right now and look prepared for another push higher. The levels on the upside we continue to watch are the 1484-1485 and the 1504. If you’re a buyer, the best way to protect yourself from the downside is simple -- use stops. 

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: With the exception of the first trading day of the year, when the S&P was up 37 handles, and Thursday, Jan. 11, when the S&P closed 11.3 handles higher, the other 7 trading days have not netted a positive or negative close of over 4.5 handles. As we said yesterday, that price action is tied to back and filling. Our view is sell the early rally and look to buy weakness. There is a large line of buy stops that start above 1472 that run to 1478 and again above 1479.70 up to 1484.00. As always, please keep an eye on the 10-handle rule and please make sure to use stops when trading futures.

According to the Ned Davis S&P cash study for the January expiration:
Tuesday has been up 19 / down 10 of the last 29 occasions
Wednesday has been up 15 / down 14 of the last 29 occasions
Thursday has been up 17 / down 12 of the last 29 occasions
Friday has been up 16 / down 13 of the last 22 occasions

Monday has been up 9 / down 13 of the last 29 occasions

It’s 7 a.m. and the ESH is trading 1458.75, down 5.5 handles; crude is down 36 cents at 93.78; and the euro is down 55 pips at 1.3330.
In Asia, 6 out of 11 markets closed higher (Shanghai Comp. +0.60%, Hang Seng -0.14%).
In Europe, 9 out of 12 markets are trading fractionally lower (CAC -0.05%, DAX -0.13%).
Today’s headline: “S&P Futures Signal a Lower Open.” 
Total volume: 1.16mil ESH and 4k SPH traded
Fair value: S&P -7.58, NASDAQ -10.15
Economic calendar: Today: PPI, retail sales, Empire State mfg survey, business inventories, Fed's Plosser speaks, credit card default rates reported, Facebook event and earnings from Lennar. WEDNESDAY: Weekly mortgage applications, CPI, Treasury int'l capital, industrial production, housing market index, oil inventories, Beige Book, Fed's Fisher speaks, OPEC's monthly market report and earnings from Goldman Sachs, JPMorgan, Bank of NY Mellon and eBay. THURSDAY: Housing starts, jobless claims, Philadelphia Fed survey, natural gas inventories, Fed balance sheet, money supply and earnings from Bank of America, Citigroup, UnitedHealth, BB&T, BlackRock, American Express, Intel, Capital One. FRIDAY: Earnings from General Electric, Schlumberger, Morgan Stanley

Mr Top Step Closing Print Video: https://www.mr-topstep.com/index.php/multimedia/video/latest/closing-print-1-14-2013
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