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Volume on the CME Group’s S&P 500 futures saw a big increase on Friday, but it had nothing to do with hedging or speculative buying and selling. The increase came from the December rollover, where trades move from the expiring December contracts into the March contracts.

While the S&P futures closed lower the last three days of the week, the losses were moderate. Outside of the S&P, NYSE volumes were low, and if you take AAPL’s volume out of the NASDAQ it basically said the same thing. The continued fiscal drag and year end have helped push more trades to the sidelines.

The S&P futures trade was dominated by the rollover as traders switched gears aways from trading to rolling positions. With an already low level of trade, the 50 or 60 locals in the S&P were left with almost no outright buying and selling in the SPH (big S&P pit). By 10:00 the only traders left in the S&P pit were the 30+ order fillers and locals in the back months trading the S&P spread.

Naughty or nice? Many of the short-term indicators we look at are weak. Some think a lot of the buying power has been used up during the most recent rally / short squeeze. Once the ESH started to short cover, the HFT (high frequency trading) systems targeted the upside stops. That said, we still think there will be some type of year-end rally.

So will the S&P be naughty or nice at year end? Right now that seems to be tied up in the indecision concerning the fiscal cliff. What we do know is President Obama won't give in on his “tax hike for the wealthy” and Democrats have done a good job with keeping the blame on the Republicans. David Wessel, economics editor of the Wall Street Journal, says a bill passed in July by the Senate could be used as a compromise to avoid the fiscal cliff by the end of the year. The bill would extend the Bush-era tax rates for one more year, but only for individuals with income below $200,000 and couples under $250,000. Taxes would go back up to where they were under President Clinton, up to 39.6%.

Wessel writes: It extends a few tax credits for lower-income taxpayers, and – this matters – it patches the alternative minimum tax for a year so it doesn’t reach deeper in the middle class. It also sets the capital-gains and dividend tax rates at 15% for most, but at 20% for those in the upper two tax brackets (not counting the 3.8% tax levied in the Obama health law.) It ignores the pending increase in the estate tax.

Last night the first real movements in the fiscal cliff talks began with House Speaker John Boehner edging slightly closer to President Obama's key demands as they try to avert the steep tax hikes and spending cuts set to take effect unless Congress intervenes by Dec. 31. Remember, the S&P didn’t start its year-end rally until Dec. 20 last year ...

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.

Our view:
Just 10 trading days left in 2012. It’s been a really long year, but the last few months have flown by. Compromise is in the air. The Republicans do not want to go on vacation without a deal and they are inching toward one. Yes, Mondays have been bad, but we still think we go up this week. The Ned Davis S&P cash study is positive all week and capped off with an up 20 / down 7 out of the last 27 occasions on Friday’s quad witch. As for today, we lean to buying weakness. That doesn't mean we won't sell a few rallies if it looks right, but we think we end up closing higher today. As always, please keep an eye on the 10-handle rule and do not forget to use stops when trading futures.

  • It’s 7 a.m. and the ESH is trading 1412, up 2.75 handles; crude is down 3 cents at 86.70; and the euro is up 7 pips at 1.3178.
  • In Asia 8 out of 11 markets closed lower (Shanghai Comp. +0.45%, Hang Seng -0.41%)
  • In Europe 10 out of 12 markets are trading lower (CAC -0.42%, DAX -0.01%)
  • Today’s headline: “S&P Futures Seen Higher, Boehner Opens Door to Tax Hikes”
  • Economic calendar: Today:  Empire State mfg survey, Treasury int'l capital, Fed's Lacker speaks, 2-yr note auction, GE annual outlook mtg. TUESDAY: Current account, housing market index, 5-yr note auction, Fed's Fisher speaks; earnings from Oracle. WEDNESDAY: MBA mortgage apps, housing starts, oil inventories, 7-yr note auction; earnings from FedEx, General Mills, Accenture, Bed Bath & Beyond. consumer sentiment, BLS state employment stats; earnings from Walgreens.
  • Globex volume:  1mil ESZ, 1.68mil ESH and 47k SPZ and 38k SPH traded
  • Fair value: S&P +7.25, NASDAQ +5

MrTopStep Closing Print Video: http://www.mrtopstep.com/closing-print-12-14-2012/

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