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ECB and S&P Two-Step

Danny Riley
ES 03-15 (15 Min)  1_23_2015
ES 03-15 (15 Min) 1_23_2015

The ECB exceeded expectations yesterday with a total of 60 billion in asset purchases per month and the S&P 500 reacted in kind. The idea is to continue at €60 billion a month at least until September 2016. The ECB said further purchases beyond that depend on whether the inflation outlook is consistent with its inflation objectives. By September 2016 total purchases will amount to €1.2 trillion but could exceed that number if the inflation outlook is seen to be weak.

The larger number of monthly asset purchases caught traders off guard. After an early morning selloff the S&P regained its footing and by 1:30 in the afternoon Central time the S&P futures (ESH15:CME) were trading up at the 2046.50 level. Remember, it takes days and weeks to knock the S&P down and only one to bring it back. MrTopStep called on Monday for the S&P to reach 2100 by next week and we see little resistance standing in the way of that.

The Dow Jones futures (YMH15:CBT) gained 246 points, or 1.5%, to 17737.00. The S&P 500 futures rose 29.8 points, or 1.5%, to 2056.40 and the Nasdaq futures (NQH15:CME) advanced 82 points, or 1.8%, to 4264.75. The CBOE’s VIX, which traded above 20 earlier in the month, fell 13% to 16.40.

I think we all saw the same price action yesterday: an early selloff and then a big reversal both in the S&P’s and in bullish sentiment. Last week the financial stocks were getting killed. Then yesterday, the financials were the best performing sector in the S&P 500. Financial stocks in the S&P 500 closed up 2.4% as interest rates went higher for the second day. Even with yesterday’s gains, financial stocks are still down 2.9% for the month, outpacing crude oil for the steepest losses in any sector.

What yesterday’s move by the ECB did was to push investors back into the stock market. After very turbulent start to the year and a recent five-day slide (Jan. 9 -19.7, Jan. 12 -12.9, Jan. 13 -6.3, Jan. 14 -8.6, Jan. 15 -18.4) the ESH15 has come roaring back, up 4 in a row (Jan. 16 +23.8, Jan 20. +3.9, Jan. 21 +9.8, Jan. 22 +29.8) and as of this morning is only 28 points off its all-time contract high.

This is how the game is played. Get the S&P 500 to sell off, get everyone short into the decline, short cover in front of a major news event and then jam the futures higher. This pattern has been repeated hundreds of times over the course of the six-year bull market, and it amazes me that traders have not caught on to buy into that weakness instead of adding short positions. Their short-sighted orders become the fuel that feeds the fire.

In Asia 11 of 11 markets closed higher and in Europe 12 out of 12 markets are trading higher this morning. Today’s economic calendar includes the PMI manufacturing index flash, existing home sales, leading indicators and earnings from General Electric (GE), McDonald’s (MCD), Honeywell (HON), and Kimberly-Clark (KMB).

S&P 500 Futures Up 4 in a Row

Our View: The DAX gained 1.3% to a record high and the CAC closed up 1.5%, its sixth straight day of advances. The euro currency sold off 2% against the dollar to 1.1369 to an 11-year low. Volatility is everywhere! This morning 11 out of 11 markets in Asia closed higher. In Europe 12 out of 12 markets are trading higher. It all looks too good to be true. Our view is that before the end of January the S&P takes out its all-time contract high. As for a view for the day, we think you have to sell the early strength and buy weakness. Don’t try to outsmart the market. The trend is your friend today, your big, volatile, euro-steroid-fueled friend.

“ECB Exceeds Expectations / S&P Rips Higher”

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 11 of 11 markets closed higher: Shanghai Comp. +0.25%, Hang Seng +1.34%, Nikkei +1.05%

  • Earlier in Europe 12 of 12 markets are trading higher: DAX +1.42%, FTSE +1.01%, MICEX +1.39%, GD.AT +5%

  • Fair value: S&P -5.95 , NASDAQ -6.52 , Dow -66.01

  • Total volume: 1.83mil ESH and 9.8k SPH traded

  • Economic schedule: PMI manufacturing index flash, existing home sales, leading indicators and earnings from General Electric (GE), McDonald’s (MCD), Honeywell (HON), and Kimberly-Clark (KMB).

  • E-mini S&P 5002028.75-24.75 - -1.21%

  • Crude56.50+2.39 - +4.42%

  • Shanghai Composite0.00N/A - N/A

  • Hang Seng24807.279-102.621 - -0.41%

  • Nikkei 22517768.301+299.781 - +1.72%

  • DAX10625.47-172.86 - -1.60%

  • FTSE 1006786.07-66.33 - -0.97%

  • Euro1.1338