Last week we said that selling rallies will get easier the higher we go and the big rally in Globex, the gap up and the failure to recoup the 1560.50 Globex highs, combined with all the negative European bank headlines, came crashing down on the S&P. Once the program arb sell started hitting, the algorithms did the rest of the heavy lifting. From the ESM’s Globex high of 1560.50 down to its low at 1539.00, the ESM sold off 21.5 handles.
One of the main ways to read the price action in the S&P futures is following the premium levels between the ESM and the S&P cash. When the levels get cheap the arb buys the ESM and sells the cash, when the levels widen out the arb sells the ESM and buys the cash. Following premium levels has alway been the best way to read the S&P, but with the algos running amok like they did yesterday, picking bottoms can be really hard to do. In the past, after several sell programs the bids in the ES that make up the program tend to pile up, and when this would happen the ES would short cover. That happened a few times yesterday, but as soon as the ESM would lose premium, the algos would start searching for more sell stops.
Brian Coolie (COOL) bought 3,000 big SPM (big S&P pit). We think this account is Deutsche Bank, which we consider smart money. We also think the purchases were set up yesterday for the beginning of today’s T+3, end of the first quarter markups. Over the course of the first three months of trade, certain patterns have arisen. One is that of the first 8 Mondays, 6 have closed lower, and of the 10 Tuesdays so far this year 8 have been up, thus the buy on Monday and hold into Tuesday. Last Friday Jeff Hirsch from the Stock Trader’s Almanac warned us the last 4 trading days of Q1 have been down over the last 7 years and so far Jeff was right on about Monday, but let’s see how the next few days go. Below is the Stock Trader’s Almanac DJIA End-of-Q1 Performance, and as Jeff said it shows a historically weak quarter end.
Historically Weak End of Q1 $DJIA $DIA $SPX $SPY
By Christopher Mistal
Over the past 23 years the DJIA and S&P 500 have declined 17 times and advanced 7 with an average loss of about 1.0% near the end of March. Excluding advancing years, the average decline is right around 1.6% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third. Today is the fourth-to-last trading day and a “bearish” icon is indicated above. Wednesday is also a “bearish” day based upon historical S&P 500 performance. Considering solid year-to-date gains (6th best DJIA Q1 since 1950), some profit taking this week would not be surprising.
Our view: How bearish are you? Even after yesterday's selloff the SPM is only 8 or 9 handles off its contract high. They get everyone going one way, then they go the other way. That is how this game is played. Despite the selloff the patterns remain the same -- rally, sell off, then bounce. We still maintain that there will be some type of markup, but with the Jewish holiday Passover starting last night and the exchange closed for Good Friday, that only leaves T+3. We still think there is a potential to rally, but we also do not see any reason to get chopped up at the end of March. Keep an eye on the 10-handle rule and please use stops.
- It’s 7:15 a.m. and the ESM is trading 1549.50, up 2.5 handles; crude is up 51 cents at 95.32; and the euro is down 14 pips at 1.2858.
- In Asia, 8 out of 11 markets closed higher (Shanghai Comp. -1.25%, Hang Seng +0.27%, Nikkei -0.60%).
- In Europe, 8 out of 12 markets are trading modestly higher ( CAC +0.59%, DAX +0.31%).
- Today’s headline: “ S&P Futures Signal Higher Open”
- Total volume: 2.25mil ESM and 16.5k SPM traded.
- Fair value: S&P +4.66, NASDAQ +8.70
- Economic calendar: Durable goods, Redbook, Case Shiller new home sales, consumer confidence, Richmond Fed mfg index, 2yr note auction
MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-3-25-2013
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.