S&P futures went into FAST market conditions after the Fed announced that they would begin to taper
The S&P futures (^GSPC:SNP) rallied over 45 handles or 2.7% from the Fed announcement low to the late afternoon high after the Federal Reserve said they were going to taper $10 bil a month starting in January of 2014.
It was 10:30 CT and every trader in the world was waiting on the Federal Reserve statement. The three weeks leading up to the day’s announcement had been weighed down by what we called the taper sellers. After three separate quantitative easing programs, the S&P up 165% from its March 2009 low and up 27% in 2013, there has been no fear.
Going into the final meeting of the year and of Ben Bernanke’s term, Goldman Sachs’ chief economist came out saying no taper, as did several other firms. Many traders we talked to on the floor said the same thing, so when the headline hit the tape the initial reaction was a quick jolt down and then a big ramp up. Goldman, like many firms on the taper, was wrong, dead wrong.
Working on the floor all these years, we’ve worked with many big accounts. From the $20 billion hedge funds to the too-big-to-fail banks to some of the largest prop trading firms in the world—you get to see what they do.
In the last few weeks the hedge funds have sold calls and S&P futures as a hedge, the option players rolled lower and the speculators sold S&Ps. They had a good reason to sell in late June when the public thought the Fed was going to taper and they had a good reason to sell this time too, but on both occasions the end result was another rip higher and a new contract high.
The news algos were responsible for pushing the ESH14 lower over the last three weeks and they were clearly helping the S&P go higher yesterday also. Once the headlines started hitting the tape and the ESH14 sold off real quick, the sellers got what we call “double short,” meaning they were already short and sold more when the S&P dropped so quickly.
Then the selling dried up and the algos went on a relentless search for upside buy stops. The buy stops started lifting the ESH14 offers that complete the index arbitrage buy programs as billions in futures, stocks and options were bought back.
The Asian markets closed mostly higher and 11 out of 12 markets in Europe are up. Today’s economic calendar starts out with jobless claims, Dallas Fed President Richard Fisher speech on the Texas economy in Dallas, Philadelphia Fed survey, existing home sales, leading indicators, EIA natural gas report, 7-year note auction and earnings from Red Hat, Nike, Rite-Aid and Accenture.
The markets were not kind to the bears yesterday and it’s far from over. Can the S&P reverse back down ? It’s not likely.
The old adage about the trend is your friend came full circle again yesterday.
The S&P was already oversold going into the Fed’s announcement and clearly the bus had gotten too full. True to form, the ESH14 initially reacted to the downside and then reversed with a vengeance. Our view is that while we cannot rule out higher prices there is a tendency for the S&P to trade sideways to lower after such a big move up.
MrTopStep felt strongly that the S&P was not going down and we still feel that way. According to the expiration study today has been up 13 / down 16 of the last 29 occasions and tomorrow’s stats show the S&P being up 20 of the last 29 occasions. Have a good day trading.
As always, don’t forget the 10-handle rule and please use stops…
- In Asia, 7 of 11 markets closed higher: Shanghai Comp. -0.95%, Hang Seng -1.01%, Nikkei +1.74%
- In Europe, 11 of 12 markets are trading higher: DAX +1.46%, FTSE +0.85%
- Morning headline: “Surprise Fed Taper Sends Dow and S&P to New Highs”
- Total volume: 705k ESZ, 35k SPZ, 2.69mil ESH and 31k SPH traded
- Economic calendar: Jobless claims, Dallas Fed President Richard Fisher speech on the Texas economy in Dallas, Philadelphia Fed survey, existing home sales, leading indicators, EIA natural gas report, 7-year note auction and earnings from Red Hat, Nike, Rite-Aid and Accenture.
- E-mini S&P 5001823.75+1.00 - +0.05%
- Crude98.55-0.22 - -0.22%
- Shanghai Composite0.00N/A - N/A
- Hang Seng23179.551+257.99 - +1.13%
- Nikkei 22515889.33+18.91 - +0.12%
- DAX9488.82+88.641 - +0.94%
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