U.S. Markets closed


Danny Riley


The most hated rally in history continued Friday with the S&P futures ripping into all-time new contract highs on the close. With a large wave of mid-month buying and multiple new contract highs over the last 2 weeks, one has to wonder how high the index can actually go? S&P 1700? S&P 1900?

What we do know is there has been no change in the current price action. Small sell programs set up larger buy programs. The narrative remains unchanged with almost no signs of fatigue. After Tuesday’s 17-handle-higher close and Wednesday’s record high, one would expect some type of pullback. We got it on Thursday (-6.2 handles) but that little pullback was a teaser for what was to come on Friday: an early pullback and then a late afternoon rip, and a $1bil MOC was the icing on the cake.

The message remains the same, a rally unwilling to derail from its current course and the BKX leading the way.


The common thought process has been that when the Fed starts talking about “tapering” its QE3 program the stock market will sell off, but it has actually sparked a huge rally in the BKX, which has gone from 54.3 on April 18th to a new high at 61.20 on last Friday's close. As for the trading floor, there has been a pickup in most of the CME’s financials futures and options products. In particular, the CME’s open outcry S&P 500 options have seen a big jump in volume, going from 20,000 lots a day to 60,000 to 80,000 a day, which does not include the 300,000 to 400,000 electronic options. Additionally the CME Group’s E-mini S&P volume has jumped to over 2 million contracts a day, which is not something we see very often on up days. Average volume on an up day is usually 1.3 to 1.6 million contracts a day.

Why So Hated?
The first reason this is the most hated rally in history is because of all the losses established during the credit crisis when the public suffered a 50%-plus drawdown on their retirement portfolios. Plain and simple, it was too steep of a decline for many people to continue to hold. Many of those accounts never re-entered the stock market, and with zero rates many investors have been sidelined. The other reason is investors that did want to get back in and continue to wait for a pullback that never comes. Below are some more reasons MrTopStep thinks make this the most hated rally in history.

  • It’s all central bank facilitated. Who could have guessed that the government that started its quantitative easing in the middle of 2008 would still be printing money in the middle of 2013?
  • The banks’ and brokerage firms’ trading desks are going broke. Many of the banks’ trading desks used to make millions or even billions a year. Now they do not make money. Over six years after the credit crisis, stock trading (in the form of shares) is barely covering its cost of capital. Trading equities is barely profitable, but that doesn't mean the banks are shutting them down, either. Many of the big investment banks are staying in the business because they are hoping for a turnaround that others feel may never come.
  • Smaller investors feel the pinch, too. In the past a profitable stock portfolio helped fund futures and options traders’ accounts. If there was extra money around, trading futures was a way to pick up some extra cash. That’s not how it works today. Very few people are willing to use an IRA or pull money from their stock or retirement account to trade futures anymore.

Big Picture
Mutual funds and ETFs took in a total of $7.8 billion the week ending May 8 and continued right into last week. As of last Wednesday, May 15, exchange-traded funds took in another $18.3 billion, the fourth largest inflow since January 1992. Another $10.8 billion poured into equity ETFs. Mutual funds took in another $7.5 billion, the largest inflows since the week ending May 2nd, 2001. While the buyers do not seem to be in a hurry, there is a high level of anxiety for those that are not fully vested. For the 11th straight month mutual fund investors were net purchasers of fund assets. Exchange-traded funds (ETFs) posted their 17th consecutive month of inflows in April in the amount of $9.5 billion.

As MrTopStep has said all year, if you want to know where the S&P is going, follow the money. Now we are adding in the banks!

Our view: LOL...all sorts of talk that the S&P is overheating. That should be nothing new, it’s been bubbling for weeks. As of Friday's close the Dow is up 17.7% and the S&P is up 17% year to date. The S&P is up 150% since making its 666 low on March 6, 2009. All 3 major averages logged their fourth straight weekly gain. Our view is that we are still going higher. We still lean to selling the early rally (if there is one) and buying weakness. Of the 16 Mondays so far this year, 8 have been up, 7 down, 1 unchanged. The average gain is 7.9 handles and the average loss is 13.7 handles. As always, keep an eye on the 10- handle rule and please use stops.

  • It’s 7:15 a.m. and the ESM is trading 1662, down 1 handle; crude is down 41 cents at 95.61; and the euro is up 28 pips at 1.2859.
  • In Asia, 9 out of 11 markets closed higher (Shanghai Comp. +0.75%, Hang Seng +1.78%, Nikkei +1.47%).
  • In Europe, 7 out of 12 markets are trading higher (CAC -0.07%, DAX +0.23%).
  • Today’s headline: “S&P 1700 only 2% Away”
  • Total volume: 1.9mil ESM and 10.8k SPM
  • Economic calendar: Ben Bernanke speaks at 7:00 CT and the Chicago Fed national activity index at 7:30
  • Fair value: S&P -4.32, NASDAQ -10.81
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/commentary/2886-closing-print-5-17-2013

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.

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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. {jathumbnailoff}