Look, there are many ways to skin a cat, but shorting the S&P has not been one of them this year. Every attempt on the downside has been a false start. All these downside false starts do is add fuel to the upside fire.
Algos and volume
One of the fundamental changes that has occurred over the last few years is volume. It has dropped precariously. It has affected the thrust of the S&P and the overall price action. Pre-credit crisis there were thousands of customers, banks, hedge funds and prop trading desks all firing orders into the ES. In October 2009 the e-mini S&P hit an all-time volume record of 6.9mil contracts in one day. Over the last two years since MF Global and PGF went out of business, a big volume day in the S&P is just north of 2.5mil, and that is on a really good day. In most cases daily volume in the S&P is 1.2-1.5million contracts, which includes 250,000-300,000 contracts traded in Globex pre-8:30 open.
1610 objective met
MrTopStep has been calling out higher levels in the S&P all year. While we have met our most recent upside objective, that definitely doesn’t mean the upside party is over. Like we said last week, what does S&P 1600 actually mean? Unlike the NASDAQ, the S&P is in uncharted territory. Many feel that the meltup will continue right up to 1654-1655.
Walk away in May
There has been a very high level of talk about selling in May and walking away. This is a trading rule MrTopStep has followed for the past 25 years and it has been an extremely good indicator. Here is our problem: We do not doubt its validity, but in this “thin to win” environment and the SPM selling off 60+ handles and making such a strong recovery over the last two weeks, we have to tread carefully.
The Dow, which closed out 2012 at 13,135, has traded up to 15,009, a 1,874-point gain, or up +14.27% year to date. The S&P futures contract closed out 2012 at 1413.30 and made its high last Friday at 1614.20, up 200 handles or +14.2% year to date. Both markets are in uncharted territory, unlike the NASDAQ and the VIX. Both markets have a long way to go to reach their all-time highs and lows.
In the end, the markets may not have the thrust they used to, but that doesn't seem to matter because of all the central banks printing money. Right now it’s full steam ahead; the question is where is the steam going to come from once the Fed stops ...
Our view: Today is the 3-year anniversary of the May 2010 flash crash. Asia and Europe have been mostly higher. There are no economic releases today. Our view is that the S&P has gone a long way and will need to fill the gap at some point. We lean to selling the early rally and buying weakness. As always, keep an eye on the 10-handle rule and don't forget to use stops.
It’s 7:30 a.m. and the ESM is flat at 1608.50; crude is down 21 cents at 9540; and the euro is down 4 pips at 1.3109
In Asia, 9 out of 11 markets closed higher (Shanghai Comp. +1.16%, Hang Seng +0.99%, Nikkei -0.76%).
In Europe, 7 out of 12 markets are trading higher (CAC -0.35%, DAX -0.05%).
Today’s headline: “S&P Futures Steady; Crude Rises on Syrian Risk”
Total volume: 1.93mil ESM and 9.6k SPM traded
Economic calendar: No scheduled economic reports; earnings from Sysco and Tyson Foods
Fair value: S&P -0.37, NASDAQ +39.31 (!)
MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-5-3-2013
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.
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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.