THE S&P 500 CAN RUN BUT NOT HIDE

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By Danny Riley
The S&P 500 futures started the day on a high note and ended the day flat. Volumes are generally low on the first trading day of the week, but they were especially low due to the Veterans Day holiday. Commodities closed mixed, the dollar closed slightly lower and crude oil fell.

Despite the lack of any economic releases over the holiday, we saw some of the same old worries returning to the markets: Europe and the fiscal cliff. After stocks posted their worst weekly losses since June, yesterday seems to be more of a pause in the action than a low in the markets. Many traders we talk to on the CME floor said they think the S&P will base at some point and said they think President Obama and Congress will reach some type of agreement to avoid part of the cliff, but not on the question of higher taxes for people making $250,000 a year and up. While some of the concerns were lifted by Obama’s comments, there still is no deal in place yet.

A decision will not necessarily help the markets. Even if the president and Congress come to terms on the fiscal cliff, there is a long list of problems the markets will need to overcome. Eurozone finance ministers met in Brussels yesterday concerning Greece’s economic reforms. Yesterday the Greek parliament did pass its 2013 budget required by the international lenders, but the Euro area finance ministers did not approve the 31.5 billion euros of aid, although they did agree to  5 billion euros so Greece will not default on bills that mature on Nov. 16. The Troika (the EC, ECB and IMF), which oversees the euro area Greek bailouts, said it sees “very large risks” to the Greek bailout plan, according to a draft report.

The next 6 weeks: Should be filled with headlines concerning the cliff. If policy makers do not reach an agreement and the automatic spending cuts and tax increases kick in at the beginning of 2013, many have predicted the U.S. will enter into a recession and could see a second downgrade like Standard and Poor’s did in August of 2011 after the government impasse on the debt ceiling. As you may recall, the Dow lost and gained 400 points on four days during that month, the longest streaks on record. But many of the floor traders we talk to think that most of the selling over the last few weeks is going to dry up and lead to a 5% rally. Deutsche Bank cut its 2012 estimate on the S&P 500 index from 1475 down to 1450.  The way we see it is the markets have already sold off, the news is out and the S&P is holding the 1350 area, at least for now. The big question is the next move back up or down.

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.
Today’s Data:

  • It’s 6:00 a.m. and the ESZ is down 8.75 handles, crude is down 52 cents at 85.05 and the EC is trading 1.2714. down 3  (but got down to 1.2665 in Globex).
  • In Asia 9 out of 10 markets closed lower (Shanghai Comp.-1.15%, Hang Seng -1.13%).
  • In Europe 12 out of 12 markets are trading lower (CAC -0.21%, DAX -0.69%).
  • Today’s headline: “Markets Roiled by Greek Bailout Delays.”
  • Economic calendar: Today: NFIB small business optimism index, treasury budget; earnings from Home Depot, Vodafone, Michael Kors, Saks, TJX, Cisco. WEDNESDAY: Weekly mortgage apps, PPI, retail sales, business inventories, FOMC minutes, 13-F filings, Facebook lockup lifts; earnings from Abercrombie & Fitch, Staples, Tyco, Limited Brands, NetApp. THURSDAY: CPI, jobless claims, Empire state mfg survey, Philadelphia Fed survey, oil inventories, Fed bank of Chicago annual conf., credit card default rates reported; earnings from Target, Wal-Mart, Viacom, Gap, Dell. FRIDAY: Treasury international capital, industrial production, e-commerce retail sales; earnings from Foot Locker, JM Smucker, Ann Taylor
  • S&P futures volume: 1.13 mil ESZ and 6.7k SPZ traded
  • Fair value (7:30): S&P -4.5, NASDAQ -14.5

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/#vid-top

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Our view:
This is not over yet. Yesterday was just a lull in the action. There is good support between 1363 and 1368, but there is a big line of sell stops that start under 1361 down to 1355 and again going through 1350. Europe opened lower, sold off and then bounced, and that is what we think the S&P is going to do today -- sell off early and then bounce. As always, keep an eye on the 10-handle rule and please use stops.

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