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S&P 1630 and DOW 15,100 BUBBLE

Danny Riley

We have seen this act before and it generally doesn't end well. What is it? Its called a stock market bubble. According to Investopedia a stock market bubble is a type of economic bubble taking place in the stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.

MrTopStep Opening Print - 5/9/2013

S&P Futures up 12 out of the last 14
There have been some astonishing runs this year in the S&P 500 but the latest one is really eye catching. The total gain over the last 14 trading days is 99.6 handles. On a closer look the S&P has been up 7 out of the last 8 trading days for a total gain of 57 handles.

Bubble Up
There have been many stock market bubbles, but the two most famous were the 1920 Great Depression and most recently the 1999-2000 Dot-com bubble. Both occurred after big leaps in technology. Large public offerings (IPO) have also been been the cause of some big reversals as a large percentage of the companies fail. The AOL / Time Warner deal would be a good example of a failed IPO. Other well known bubbles occurred in Japan, Brazil, Taiwan, France and England. Bubbles occur when people “dismiss concerns over the economy”, and bubbles are not specific to just the stock market; gold , silver, commodities, currencies, you name it there has been a bubble.

Nowhere to go but up
By the time the S&P does reverse most of the sellers will be exhausted. Who’s to say that gold can sell off down to $1,000 or silver down to $15.00 to $18.00 or the EURO down to 122. Who’s to say that the S&P doesn't keep doing what its doing, going straight up. Who’s to say that the S&P can't go to 1650 or 1700 or even higher. Yes we were and still are looking for a pullback in the S&P but once the ES kept going up we knew it was business as usual. Tuesday the ESM sell off from 1628 down to 1622 and rallies. Wednesday the ESM sells off from 1629 down to 1622.50 and rallies to new highs “after” a $1.1b buy imbalance shows up. Who can fight that type of price action?

Retail & Local Traders
Going up maybe good for those long the stock market but for retail futures traders and the locals on the floor its one of the worst things that can happen. As volatility drops the risk goes up. GME a well known, order filler and local told me yesterday that his aim is to try and make 40 to 50 ticks a day while trading in the pit. He said a ‘good’ day is 100 ticks and that he tries to keep his losses to to 40 ticks a day but that sometimes you just can't control the losses as well. When I asked him how the other locals in the pit were doing he said that most locals keep quiet about what they make or lose. The problem is simple, its a one way street and every time the S&P sells off the locals and retail think its the beginning of the reversal.

However you add it up it all comes out to one thing...the stock market is going up and its not taking any prisoners along the way. The shorts have been demolished and you can see it in the big jump in the S&P options which have gone from doing 25k contracts a day to 75k+ a day. Many of the funds that sell options are getting killed. A very well know option fund in Chicago has been getting out and the has dropped 14% over the last two months, putting into perspective that there must be a lot more out there.

Our view: If you read today's Opening Print you know that the S&P futures have closed higher 12 out of the last 14 days for a total gain of 100 handles. While we thought the S&P would back off a little this week it has done the exact opposite. Overnight both Asia and Europe backed off a little but this morning we have a slew of economic reports to get past. Lets face it, this is getting harder. Both the bonds and the S&Ps closed higher yesterday. With all that said we are back to the Pit Bulls rule about looking for a low the Thursday / Friday the week before the expiration. As always, keep an eye on the 10 handle rule and please use stops when trading futures.

  • It’s 7:15 a.m. and the ESM is down .75 handles at 1628.00, crude is down .32 cents at 96.30 and the EC is trading 131.54, down 18 pips.
  • In Asia, 6 out of 11 markets closed lower (Shanghai Comp -0.59%, HANG SENG -0.14%, Nikkei -0.02%
  • In Europe, http://finance.yahoo.com/intlindices?e=europe
  • Today’s headline: “Global Markets Take A Breather, S&P Futures Steady”
  • Total volume: 1.58mil ESM and 5.6kk SPM traded
  • Economic calendar: Biggest day of the week for economic releases : Chain Store Sales, Jeffrey Lacker speaks, Jobless claims, Wholesale trade, Nat gas numbers, 30 Yr- bond auction, Charles Plosser speaks, and Money Supply
  • Fair value: S&P , NASDAQ
  • MrTopStep Closing Print Video: https://www.youtube.com/watch?v=noQor8UGan8

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.