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Danny Riley
indexes 4-15

The world of risk on, risk off came to a head yesterday with the Dow having its worst day of the year, down 1.79%. The S&P closed down 2.3% and the Nasdaq and Russell were down 2.38% and 3.78% respectively. If you're surprised, you shouldn't be! 


Bubble mode

Everything comes to a bubble eventually. In 1999-2000 it was the tech stocks, in 2007 it was the credit crisis and most recently it’s the gold market. Yesterday gold dropped 9.3% to close at its lowest level since 2011 and also had its largest two-day decline since 1983. Crude oil has been bubbling, with Brent dropping below $100.00 for the first time since July.


Comfort vs. uncertainty

As traders we get used to seeing certain market behavior, and the big thing this year has been all the back and filling and new highs. Traders have become used to seeing the markets pull back a little and rally, but as we all know, they can't go up forever. When uncertainty meets the S&P at a new contract high it never ends up well, and over the last few days that has played out in the stock market with yesterday’s big down move. What we see when gold is selling off is liquidation but what others see is inflation. 


Consistent selling

Yesterday’s selloff began on the open and never let up all day. The selling was consistent and after a small uptick in the afternoon the S&P accelerated to the downside after the terrorist attacks on the Boston Marathon helped cap off the worst one-day decline since Nov. 7, 2012. Volume was robust from the start of the day to the close with over 2.85mil ESM traded. Last week when the S&P rallied to new highs we saw oversized upside volume (considered bullish) and yesterday we saw overside downside volume, which is considered negative. 


Are the highs in?

One of the things I have learned from the Pit Bull is that while the old Stock Trader’s Almanac adage is to “sell in May and walk away,” the Pit Bull thinks the new rule is “sell in the first two weeks of April and walk away.” The historical price action that generally occurs in May has moved to April and yesterday’ selloff happened to fall on the April 15 tax deadline. It’s all part of what we call the ever-changing new world trading order. This doesn't mean the S&P can't go back up -- it probably will -- but we think caution signs are flashing. 


Overall price action

The price action has been changing. What used to be an early morning rally, pullback and rally again is not as easy to read as it used to be. With the program trades loaded up with buy program inventory, yesterday’s 38-handle drop showed how easy it is to push the futures into sell program territory and keep them there. As I have said many times, the higher the S&P goes, the higher the risk of a big letdown. 


Our view:  Yes, crude and gold rallied last night; they are both very oversold. The S&P rallied overnight also. The way we see it is the S&P was waiting on a black eye and it got it. This week is the April expiration week and despite all the down moves the Ned Davis S&P cash study shows a different picture: https://www.mr-topstep.com/index.php/layout/options/2513-expiration-study-for-april  Our view is to sell the early rally and buy weakness. 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 up 13.5 handles at 1557, crude is down 14 cents at 88.57 and the EC is trading 1.3137, up 92 pips.
  • In Asia, 7 out of 11 markets closed higher (Shanghai Comp. +0.59%, Hang Seng -0.46%).
  • In Europe, 12 out of 12 markets are trading lower (CAC -0.46%, DAX -0.39%) 
  • Today’s headline: “Gold, Crude and S&P Futures Bounce”
  • Total volume: 2.85mil ESM and 9.5k SPM traded
  • Economic calendar: Consumer Price Index, housing starts, Redbook, industrial production, Elizabeth Duke, Narayana Kocherlakota and Janet Yellen speak 
  • Fair value: S&P +9.89, NASDAQ +18.88

MrTopStep Closing Print Video: https://www.mr-topstep.com/index.php/multimedia/video/latest/mts-video-of-the-day-4-15-13-tim-haefke 


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.