THE S&P’S LATE-DAY SELLOFF: WHY AND WHAT IT MEANS

MrTopStep.com

One of MrTopStep's goals is to keep you informed of what is actually happening in the S&P futures without candy coating. No making up things, no fluff, just real market flow. Like we have said hundreds of times, our readers don't care about a few run-on sentences or bad punctuation. You come here because we say it like it is.

We are not sure what all the big financial publications had to say about yesterday's late selloff in the S&P because we know whatever they say does not come directly from the source. They are not on the floor, they do not see the order flow and nor would they understand it if they did. No swipe at the writers but none of them have ever worked on the floor or in the trenches where our desk is.
 
Over the last 2-plus weeks several patterns shifted. One of the main shifts is the S&P futures making its low of the day on the open almost every day. The other part is the absence of the selloff in the S&P that typically occurs after Europe closes. In the last few weeks the early selloff has been replaced by a selloff after 2pm, which has mainly been followed by a big late-day runup and new highs. We have no idea why the flip-flop but we do know why the S&P sold off late in the day yesterday and it doesn't take a Harvard grad to figure it out. Plain and simple, the S&P ran out of gas.

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The reason the S&P futures sold off yesterday is because all the midmonth rebalancing that helped push stock higher over the last few days forced the S&P options players (funds) to pay up / roll higher. Whether the short selling option funds rolled higher, bought futures to protect or liquidated, all of that added up to buying pressure. After two solid weeks of increased volume in the S&P, the volume had let up; to us that meant all the rolling / buying had been used up, leaving the S&P susceptible to a selloff, and that is exactly what happened. With few bid and sell stops under 1651, the algos and the sell programs kicked in and took advantage of the low liquidity environment.

Does that mean the rally is over? We doubt it, but it was a nice selloff, we just need a lot more of them.

Our view: Asian markets had a big night up and Europe is mixed to higher this morning. Without making this a book, we feel that yesterday's selloff was rather telling. The late-day weakness was a great example of what happens when all the options buying is used up. Can this carry into today’s trade? Despite the futures trading higher this morning, we think so. We lean to trying to sell the early rally and buying weakness. Our concern is not what the S&P does early but what it does late -- if the S&P is weak going into the end of the day, we are going with the Pit Bull rule that Monday will be weak too. While the markets may remain firm, we think they will have a lot to digest next week with the China PMI, the BOJ press conference, Bernanke’s testimony and the Fed minutes next Tuesday and Wednesday. As always, keep an eye on the 10-handle rule and please use stops when trading futures.

  • It’s 7 a.m. and the ESM is trading 1654, up 6 handles; crude is up 59 cents at 95.75; and the euro is down 37 pips at 1.2872.
  • In Asia, 8 out of 11 markets closed higher (Shanghai Comp +1.38%, Hang Seng +0.17%, Nikkei +0.67%).
  • In Europe, 9 of 12 markets are trading higher (CAC +0.43%, DAX +0.19%).
  • Today’s headline: “S&P Futures Rise Before the April Expiration”
  • Total volume: 1.91mil ESM and 9k SPM
  • Economic calendar: Consumer sentiment, leading indicators and the Fed’s Narayana Kocherlakota speaks on panel on monetary policy and financial regulation at the University of Chicago’s Booth School.  
  • Fair value: S&P +5.48, NASDAQ +8.66
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-5-16-2013

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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