S&P 500 FUTURES: NOT CHILDS PLAY

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My six-year-old nephew sat in my lap the other evening as I looked at the weekly S&P chart in NinjaTrader. I asked him where he thought the line would go this summer and without hesitation he did an interesting thing.

He measured out little boxes with his thumb and forefinger to see how far it had risen in past months, then made another box into the future and said, "Seven hundwed and a thousand. "
"You mean, one thousand seven hundred," I said.

"That's what I said!" He added, "Wait, it's seven hundwed...and a thousand...and one. Can I play MineCraft?"

I reminded him there's no screen time on school days and he went to read The Hobbit.

But he might be right. He's not the only one, though perhaps the youngest one, to predict that the S&P 500 will go to 1700. There are several Fibonacci scales that converge there and a long trendline from spring of 2010 that lands right above 1700 this summer.  I should warn the fundamental traders that I'm not going to discuss the rumored end of Fed bond buying, or the impact of Abenomics on Japanese exports or the ECB's possible curtailment of austerity programs that aren't working.

Nor will I discuss new home sales, the manufacturing index, consumer sentiment or confidence or comfort, or the other manufacturing index or existing home sales or (deep breath) the orders of durable goods that will, ostensibly, make those existing homes look like new homes. All of those numbers and more come out this week.  And as they do, pundits will deliver headlines that start with "stocks soar on" and "bonds tumble on" and "gold falls sharply as," further adding to the carbon dioxide level of 4ppm in the atmosphere. If there was a futures contract on hot air, I'd be long.

The question for working traders isn't whether these measurements are real. They are real and will have real consequences. The question is, how risky are they? How risky is it to have a USD/JPY rate where it is now?  That's what we're really trading. Not oil or grain or interest rates or company value, but risk. Risk is what we're trading, in every market.

We all have a certain amount of risk we can tolerate. We will buy what gets us into that comfort zone and sell excess risk that we can't tolerate. When we all do this together, with freedom and without cheating, everyone is at a risk they can tolerate. (Sounds a bit socialist, doesn’t it?)  In Prime Minister Abe's eyes, an expensive yen is more risky than a devalued one, so Japan helps the yen get cheap against the dollar.  And the risk of a divided and resentful Europe and 25% youth unemployment has finally begun to seem worse than the risk of spending.

Though the risk of Americans defaulting on their mortgages is serious, the risk of not employing people in construction is worse.  Though the risk of inflation is always on the Fed's radar, the greater risk lies when we don't have credit to offer. Credit, after all, comes from the Latin for "trust." That's what money is, little tokens of trust. When the people of a nation or a planet stop trusting each other, there are few risks greater than that.  So for the last few months, has the risk of stocks getting cheaper been worse than the risk of a bubble? Well, yes.

Higher share prices mean companies take other risks, like hiring people. Private sector job growth has happened month after month without fail since late 2009. It slowed last month, perhaps because of the sequester, but we still added 119,000 jobs in April.  And what about that sequester? Isn't that risky? Cutting taxes on people who can afford to pay them and have enough left over for food and health care is risky. Firing people from vital government jobs is risky.

But Congress uses a different calculation than the people, who don't depend on PAC money. And yet, as White House scandals soar to new highs along with stocks, the GOP's approval rating just hit an all-time low.  Meanwhile, President Obama's approval rating moved up a few points since last month, according to the same poll by CNN. (Speaking of trusted...) There are algorithms that combine all of these factors and even silly ones like astrology into trading signals. Some of them may even be trading your money.  Trading tends to feel less risky to some when it's other people's money. But to others, it feels even more risky when it's someone else's money on the line. That's the risk of having a conscience.

Next time you look at a chart, any chart that shows one thing being exchanged for another, ask yourself, what risk is the seller offering to share or give to the buyer in exchange for money? And what risk is the buyer offering to take off the seller's hands?

And remember that, however much the markets are dominated by algorithms and computer programs, the feeling of risk is still what people focus on. People like the way trading systems make them feel: safe from their own fear and greed. Think about that next time you're watching prices soar or plummet or simply fail to react to news. It's almost as though the news has already been priced in. (It has.) People are finding a comfortable level of risk.

And while you're looking at that chart, try taking your thumb and forefinger and measuring out little boxes. It's much the same method Roger Babson used to predict the great 1929 crash and that many others have used in their technical analysis. Amid all the fundamental news coming out this week, I'm going to stick with the prediction of a very wise 6-year-old and say the S&P will hit seven hundred and a thousand and one.


Our view : Lots of Fed speak around. Yesterday Chicago Fed president Charles Evans said the U.S. economy is “improving quite a lot.” Today, St. Louis Fed president James Bulla rd talks monetary policy in Frankfurt and Fed Chairman Ben Bernanke testifies on the economy tomorrow in front of Congress. Asia closed mostly lower and European shares are starting out the day on the weak side. It’s been up, up and away over the last three weeks with little to no pullback. We think that may change slightly over the next few days. Our view is to sell the early rally and buy weakness with a bias to the downside. The sell stops are building up again and start in under 1661 down to 1657 and again under 1654 down to 1650. 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 ESM is trading 1664.50, unchanged; crude is down 29 cents at 96.42; and the euro is down 33 pips at 1.2866.
  • In Asia, 7 out of 11 markets closed lower (Shanghai Comp. +0.22%, Hang Seng -0.54%, Nikkei +0.13%).
  • In Europe, 7 out of 12 markets are trading lower (CAC -0.19%, DAX -0.19%).
  • Today’s headline: Index Futures Seen Lower; Amari Backtracks
  • Total volume: 1.74mil ESM and 5.7k SPM
  • Economic calendar: Redbook and James Ballard and William Dudley from the Fed speak
  • Fair value: S&P +0.11, NASDAQ +0.25
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-5-20-2013

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. {jathumbnailoff}

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