S&P 500 AND THE VIX: BUYERS BEWARE

MrTopStep.com

If we have learned anything in the new world trading order, it's that nothing stays the same for very long. Over four years ago we set out to do something different. The intent was to expose the secrets and dispel some of the myths of the trading floor, to educate traders both new and old on how money is really made -- and lost. Like the saying goes, you gotta pay to play.  

Friday’s almost full day of low volumes and narrow trading range seemed to indicate that investors were pulling back in front of this coming week's barrage of earning reports from many of the big financials like B of A, Goldman and JPMorgan. The higher the markets go and the lower the VIX gets, the more traders are going to the sidelines. On Friday the CBOE Volatility Index closed at 13.37, down almost 26% in the first 8 trading days of the year. Below is the last 10 trading days in the S&P futures. As you can see, on the last day of the year the S&P slipped 27 handles and since then has been up 6 out of the last 10 trading days for a gain of 83 handles.
 
According to Lipper, during the week ending Jan. 9 investors poured more than $7.5bil into stock mutual funds, the largest inflow in 12 years. That is on top of the $10.78 billion into stock ETFs for a grand total of $18.32bil into stock funds, the largest jump into stocks since 2008.]

There are a lot of reasons why the stock market is rallying now. Very strong seasonals and large inflows of new money going into stocks have always been part of the new year, but this year the markets are also reacting positively to the fiscal cliff deal. Many nervous investors unloaded stocks or pulled money out of their investment accounts before the deal was struck, and now that the cliff has been averted there is a rush to put money back into the stock market.

Complacency and the S&P 500: As the market rises back to its pre-2007 credit crisis high, investors are back pouring money into stocks. History has taught us that when the fear gauge drops as it has, complacency takes over. Last Friday’s VIX low at 13.22 was the lowest close since June 2007 when it settled at 13.36. As of Friday's close the VIX has fallen 80% in four years.

Debt ceiling fight:  Right now the low volumes and all the new money pouring into the stock market are favoring the upside. The overall back and fill pattern that helped support the S&P futures has been showing up in the first two weeks of the year. With the VIX clearly at levels that are prone for reversals and the upcoming debt ceiling fight that will include the resumption of the 6.2% payroll tax and more government spending cuts, the possibility of a pullback or early year reversal cannot be overlooked. Despite being a bull and thinking higher, we also feel the higher the S&P goes, the greater the risk of a setback.

The higher they go, the harder they fall: There are four weeks until the government spending cuts. The levels we are focusing on right now are the 1485 and 1504. Can the S&P futures keep going up? Sure, but at some point complacency will take over and the VIX will do the rest...

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: The spoos closed on a four-year high last Friday. While the NYSE saw increased volume, the index markets (S&P and Nasdaq) were seeing some of the lowest volumes since the Christmas holiday week. Sometimes when they run buy stops the HFTs increase volumes, but that didn't show up in the ESH, where only 860k traded in the day session. The bulls seem to be gaining confidence; sentiment continues to increase the higher the S&P goes. Today we have no scheduled economic reports. We lean to selling the early rally, then buying weakness. As always, keep an eye on the 10-handle rule and please make sure to use stops.

According to the Ned Davis S&P cash study for the January expiration:
Monday        has been up 13/ down   9 of the last 22  occasions
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 6:45 a.m. and the ESH is trading 1466. down 1.25; crude is up 43 cents at 93.99; and the euro is up 16 pips at 1.3362.
    In Asia, 9 of 11 markets closed higher (Shanghai Comp. +3.06%, Hang Seng +0.64%).

    In Europe, 11 out of 12 markets are trading higher (CAC +0.46%, DAX -0.56%).
    Today’s headline: “China Stocks Surge; U.S. Stock Futures Little Changed After Two-Week Rally”
    Total volume: 1.12 mil ESH and 10k SPH traded
    Fair value: S&P -0.70, NASDAQ -12.31
Economic calendar: Today: Fed's Williams speaks, Bernanke speaks. TUESDAY: 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://mr-topstep.com/index.php/multimedia/video/latest/closing-print-1-11-2013

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