S&P thaw not a meltdown

MrTopStep.com

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lakemichigan 300x202 S&P thaw not a meltdown

S&P thaw not a meltdown

Lake Michigan shore, Chicago

The stock market took a breather yesterday after a three-day decline with the S&P [^GSPC:SNP] closing up 0.69%, Dow Jones Industrials [^DJI:DJI] closed up 0.57% after five lower closes in a row and the Nasdaq Composite [^IXIC:Nasdaq GIDS] closed up 0.35%.

Earnings matter

Ford Motor Co. [F:NYSE] reported better-than-expected earnings and homebuilder DR Horton reported a pickup in sales in January and had its most profitable quarter since 2008.

Despite some negative warnings, according to Greg Harrison, senior research analyst at Thomson Reuters, of the 153 companies in the S&P that have reported earnings, 69.3% of those companies have beat Wall Street’s expectations while 68.6% have posted revenue that topped expectations. Pfizer [PFE:NYSE] led blue chips with better-than-expected fourth quarter sales and profits.

Short-term oversold

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ES 03 14 15 Min 1 29 2014 300x180 S&P thaw not a meltdown

S&P thaw not a meltdown

The short sellers showed up in force over the last few days. Yesterday’s trade was a good example of what happens when everyone gets “too short.”

There has been a variety of sellers. Many of the big hedge funds sold the E-mini S&P futures [ESH14:CME] both as a hedge and in speculative short positions. The short option players rolled lower and the level of index arbitrage sell programs was some of the highest we have seen in over a year.

The problem is, all the selling was done pre-Fed announcement, and with a two-day wait to hear what the Fed says, the S&P covered those same short positions and went back up.

Has everyone covered their shorts? Not a chance—and if the S&P sells off this afternoon we expect those sellers to add to their short positions.

Pop or drop

It’s decision day for the S&P: Is it going to pop or drop?

To tell the truth, unlike yesterday we don’t know. What we do know is there will be a lot of S&P chop going on, right up to the 2:00 PM ET announcement.

We do not feel there will be any other outcome than the Fed tapering by another $10 billion. The unpredictable part is how the ESH14 will respond. It’s our guess that initially the S&P sells off, but we also are worried that the whole decline could end up an enormous downside false start.

Let’s face it, the futures market is being clouded by weakness in emerging markets, an overheated real estate market, and talk of raising the debt ceiling. But what we should not forget is how the S&P took bad news and turned it into good news throughout all of 2013.

The Asian markets closed modestly higher and Europe is trading mostly higher as well. Today’s economic and earnings schedule begins with the MBA purchase applications number, EIA petroleum status report, 2-year note auction, FOMC meeting statement to be released at 1 p.m. CT. and earnings from Boeing, Facebook, Chrysler/Fiat, Novartis, Biogen Idec, EMC, JetBlue, Dow Chemical, Wellpoint, Qualcomm, Citirix, Novartis, Marathon Petroleum, Valero and Symantec.

Our view

Stocks closed modestly higher on the first day of the Fed’s two-day meeting but it may be a different story today. The bears don’t seem too scared about the upside.

It’s funny how when the S&P sells off 3 days in a row everyone starts talking market crash. Sure, the bears may be right about the downside, but they have a lot of downside to make up before I can say they are right.

It’s possible we work lower, but the S&P would have to drop 10-15% before I would get concerned.

As you can see, I am staying away from the “sell the rallies, buy weakness” thing right now. I want to see how the S&P reacts later today. If you don’t follow me on Twitter you should. @MrTopStep.

As always, do not forget to keep an eye on the 10-handle rule and please use stops when trading.

  • In Asia, 8 of 11 markets closed higher: Shanghai Comp. +0.56%, Hang Seng +0.82%, Nikkei +2.70%
  • In Europe, 11 of 12 markets are trading higher: DAX +0.75%, FTSE +0.61%
  • Morning headline: “Markets seeking direction ahead of Fed announcement”
  • Total volume: 1.7M ESH14 and 10.9K SPH14 contracts traded
  • S&P Fair Value: 1786.55 (3.70 below futures)
  • Economic and earnings calendar: MBA purchase applications number, EIA petroleum status report, 2-year note auction, FOMC meeting statement to be released at 1 p.m. CT. and earnings from Boeing, Facebook, Chrysler/Fiat, Novartis, Biogen Idec, EMC, JetBlue, Dow Chemical, Wellpoint, Qualcomm, Citirix, Novartis, Marathon Petroleum, Valero and Symantec.
  • E-mini S&P 5001771.25-10.00 - -0.56%
  • Crude98.55-0.22 - -0.22%
  • Shanghai Composite0.00N/A - N/A
  • Hang Seng22035.42-106.189 - -0.48%
  • Nikkei 22514914.53-92.529 - -0.62%
  • DAX9229.57-143.91 - -1.54%
  • FTSE 1006467.20-71.25 - -1.09%
  • Euro1.3481

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 S&P thaw not a meltdown
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