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By Danny Riley
It was not a good day for the stock market. The S&P 500 posted its biggest daily loss since June, closing down -2.4%. All 10 S&P sectors closed lower with the financials leading the way, down -3.5%.  The Dow suffered one of its single largest declines of the year, down -2.36%. The NASDAQ closed down 75 points or -2.48% as investors focused on Europe's debt, President Obama's re-election and the U.S. budget. The stock market was not very kind to President Obama in his first election in 2008. On his first election day stocks fell by the largest margin for a day following a presidential vote. Each of the three major U.S. indices fell by -5% to -5.5%.

The S&P futures were all over the place.After selling off in Globex Tuesday night the ESZ staged a big rally back up to the 1431.75 just above last week’s 1430.50 Globex high and triple top. This area has acted as a big resistance level over the last few weeks. Yesterday the SPZ opened at the 1410.50 to 1410 level, nearly 21.5 handles lower than the Globex high, and then S&P got hit by wave after wave of sell programs. After several weeks of holding just above the 1400 level the S&P started to hit a big line of sell stops that started under 1402.00 all the way down to 1385. After making its low at 1384.30 the SPZ rallied all the way back up to the 1398.50 area and then sold back off late in the day, settling at 1389.10, down 36.1 handles.

Buy bonds / sell S&P
The name of the game yesterday was asset allocation. While all eyes were on the S&P, the bond market skyrocketed above 150.00. Many of the big investment firms bought bonds and sold stock yesterday on the belief that Obama's re-election means higher taxes and more regulation. Former Federal Reserve Chairman Alan Greenspan said the election perpetuated the political status quo and hasn’t increased the probability of resolving the fiscal challenges. Barclays Plc reduced its estimate for where the S&P 500 will end this year by 5% from 1395 to 1325 on concern a divided American government will delay a resolution over spending cuts and taxes.

Hope for the best, prepare for the worst
This morning the ECB will release its monthly rate decision. Because Mario Draghi is handcuffed by European leaders, there is not much he can do. The Greek government voted and approved the austerity package needed to unlock vital aid needed to avert bankruptcy. Here in the U.S., political leaders promised to try to avoid year-end spending cuts and tax increases that threaten to push the country back into recession. Our question is, after four years of fighting, can the government come together for the good of the United States and its people? We sure hope so ...

Our view:
We would like to say this is over, but that's the farthest thing from the truth. There are so many moving parts and so many conflicting views that the markets could remain in a state of flux for some time. As we have learned, our government does not move until it is pushed or coming down to a deadline, meaning uncertainty is going to prevail. Generally after a big down day like yesterday the S&P trades sideways to higher, but based on how the S&P closed we cannot rule out another flush. If you were on the MrTopStep chat yesterday you know how I called the markets lower, posting things like “BUYERS BEWARE” and posting almost every time a sell program hit and nailing all the downside sell stop levels. If you asked the Pit Bull, he would tell you that I rise to the occasion and that my program trading skill set can be very helpful. As always, keep an eye on the 10-handle rule and please make sure you use stops when trading futures.

Danny Riley is a 34-year veteran of the trading floor of the CME Group.

  • It’s 5:30 a.m. and the ESZ is up .75 handles at 1389.75, crude is up 78 cents at 85.22 and the EC is trading 1.2750, down 23 ticks.  
  • In Asia 10 of 11 markets closed sharply lower (Shanghai Comp -1.63%, Hang Seng -2.41%).
  • Europe is mixed; 6 markets are up and 6 are down (CAC +0.35%, DAX +0.45%).
  • Today’s headline: “Euro weakens as eyes turn to ECB meeting”
  • Economic calendar: Today: International trade, jobless claims, 30-yr bond auction, Kellogg analyst day, 3M investor mtg, OPEC press conference; earnings from Dean Foods, Wendy's, Disney, Groupon, Nordstrom, Nvidia, Kayak, Zipcar. FRIDAY: Import/export prices, consumer sentiment, wholesale trade; earnings from JCPenney
  • VOLUME: 3.2mil ESZ and 15k SPZ traded
  • SPREADS: 480 SPZ/H spreads traded
  • FAIR VALUE: S&P +2.5, NASDAQ +8.5   

MrTopStep Closing Print Video:http://www.mrtopstep.com/closing-print-11-7-2012/



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DISCLAIMER: The information and data in the following report(s) 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.