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THE S&P 500 FUTURES AND 'IRRATIONAL EXUBERANCE'

Danny Riley

    The first 2-1/2 months of 2013 have flown by. Backed by the Fed’s quantitative easing policies, the Dow is up +10.67%, the S&P is up +9.43%, the NASDAQ is up +7.6%, the Russell 2000 is up +12.14% while the CBOE’s VIX is down a whopping -37.25%. As we head into the end of the first quarter there are few signs of a letup.   Yes, the Dow snapped a 10-day rally, but all the indices are on or just a few points off their record highs. It seems everything is working in favor of the stock market right now. As the markets head into the end of the first quarter, the end of the best six months for stocks nears and the old adage about selling in May and walking away may take on a new meaning. Many traders we talk to on the floor are thinking it may be time to start taking some profits. Our desk in the S&P has been part of every major stock market event from the ’87 crash to the flash crash, but there have been few times that we have seen the stock market go up so much in such a short period of time with so few pullbacks / corrections. Since the end of World War II there are only 4 occasions that the Dow has had a winning streak beyond 10 higher closes in a row; the longest was back in 1897 (14 days) and the most recent run in January 1992.   “Irrational exuberance”: With the S&P up almost 10% in the first quarter, the churning on the upside seems to have no end in sight. There has been no change in the price action at all. If the S&P opens higher it trades up, sells off a little, then rallies again. If it opens lower it rallies a little, sells off again and rallies. While we do not see the S&P falling off a cliff anytime soon, we also do not know how much higher it can go as we head into the end of the quarter and it nears its old highs. On Friday Alan Greenspan was quoted on CNBC saying that "irrational exuberance" is the last term he'd use to describe today's market. Greenspan went on to say that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices.    We remember all too well what happened after Greenspan’s speech on Dec. 5, 1996. And while we fully understand that not all the previous rallies have ended badly, we also know that the “irrational exuberance” quote came back to haunt the markets during the 1999-2000 tech bubble.     Let’s face it, at some point the S&P is going to correct. Will it be because of irrational exuberance or will it be the end of the Fed quantitative easing programs? No one know for sure, but what we do know is the markets can’t keep going up forever.    Our view: Mondays have not been good to the S&P futures for a long time. According to our trading rules, if a quad witch goes out weak, the Monday after tends to be weak, but this morning the ESM is getting a kicker to the downside. The decision to raise $7.6bil  to rescue Cyprus could have some very negative implications and risk political backlash for the newly elected government. It’s 6:45 a.m. and there are already 400k ESMs traded. We do not think the bull market is over, this is just a bump in the road. Ideally we think we will bounce at some point, but I want to get to the floor and get a handle on the price action. The ES has run a lot of buy stops this year and it may be time to run some sell stops. As always, keep an eye on the 10-handle rule and please use stops when trading futures.    

10-day Dow streaks 1996 vs 2013
  • It’s 7:15 a.m. and the ESM is trading 1540.25, down 13.25 handles; crude is down 1.02 at 92.42; and the euro is down 109 pips at 1.2953.
  • In Asia, 11 out of 11 markets closed lower (Shanghai Comp.- 1.68%, Hang Seng -2.0%).
  • In Europe, 11 out of 12 markets are trading lower (CAC -1.40%, DAX -0.97%).
  • Today’s headline: “S&P down sharply on Cyprus bailout concerns”
  • Total volume: 1.7mil ESM and 11k SPM traded.
  • Fair value: S&P -14.20, NASDAQ -22.91
  • Economic calendar:  Housing Market Index, 3- and 6-month auctions 

MrTopStep Closing Print Video:  https://mr-topstep.com/index.php/multimedia/latest-you-tube-videos/danny-riley-closing-print/video/latest/closing-print-3-15-2013    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.  _____________________________________________________ Follow us on Twitter @MrTopStep https://twitter.com/mrtopstep Sign up for our free mailing list at http://mrtopstep.com/ for full report. 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. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.    {jathumbnailoff}