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Danny Riley

After being up nearly 17% in the first 5 months of 2013, the S&P is showing signs of wear and tear. After exiting the best 6 months for stocks, the market finds itself in a position it has been in only a few times this year -- going down.


Two-way trade

All year the S&P has been in a buy weakness mode. After the S&P futures rallied, they sold off and rallied again. After making its 1685.50 high and selling off under 1650, the S&P has been unable to hold the rallies and unable to recapture that all-important psychological level.

As the prices adjust to the downside two things have occurred: 1) the S&P cannot hold the rallies and 2) after a buy program that would generally lead to a further push, the ESM slips right back into index arbitrage sell program levels.

Buy imbalances turn south

While there has been little doubt that all the buy imbalances this year helped catapult the S&P to all-time new contract highs, that changed over the last month as the word “taper” started getting used by the Fed concerning its quantitative easing 3+ program. Around that time the ESM started to lose its footing.

If you wanted to know where the S&P was going this year, all you had to do was follow the buy imbalances and mutual fund inflows. As stupid as this sounds, if you want to know where the S&P is going all you have to do is look at all the sell imbalances. There have been few, if any, buy imbalances in the last month.

Bond nosedive

I started in the bond pit at the CBOT. My roommate inherited a bond membership when he was 19 and from day one was filling all the Goldman prop bond business. He went from making $180 a week working phones in the grain room to making $50,000 to $60,000 a month and up. I was there when Tom Baldwin turned $15,000 into over $150,000,000. I worked for Rick Barnes in the bond pit and Gary Bielfeldt from “Market Wizards.” Both would trade thousands of bonds in a day while I worked the phones.

I started when the bonds were trading 79 and I was there when they ran up to 118, but in all the years of watching the bonds the most recent 10-point drop is perhaps the worst I’ve seen. As the bonds fall it impacts the real estate market, which has been one of the drivers of the stock rally this year. As the bonds fell so did the IYR (Dow Jones US Real Estate Trust). In the last three weeks the ETF has fallen over 9%.


Buying and holding precious metals got a little harder, too, this year. After a run to 1800 in 2012 the gold market has lost its shine. While the metal is considered a safe haven, the last 6 months have not been kind; from the highs in Oct 2012 to April 2013 gold futures have fallen nearly 25%. The overall view of gold has been that the downtrend was still in place, but the recent spike suggests there is renewed risk floating around in the markets.  


Every Tuesday I do a Japanese radio show from the S&P desk. It’s a widely watched and heard program in Japan. While the Japanese traders want to know what's going to happen in the S&P and U.S. bond market, during my last two interviews I clearly pointed out the risk that we see coming out of Japan. When the BOJ failed to act this week it sent the S&P straight down.

While the Bank of Japan has been cranking up its asset-bond buying program, the Nikkei 225 sold off 14% from May 22 to the first week of June. The problem is when the Nikkei sold off bond yields soared. Risk in Japan is way up.

Pick your poison

In the end many of the market drivers that helped push the Dow and S&P to all-time new highs are starting to break down. The rally that never seemed to end is now starting to fail. Is this the beginning of a pullback correction or will the S&P start to accelerate to the downside?

The Pit Bull has been warning for over a year that when the party is over the music will stop. As we have always said, no one knows for sure where the S&P is going to go next, but what we can say is this current move south does not seem like it’s over yet.

Our view: The Asian markets closed sharply lower, with the Nikkei down a whopping -6.35%, and Europe is down hard this morning. Starting today and tomorrow there are 11 separate economic releases. It feels like the S&P wants to work lower, and a break under 1606 could start an avalanche. While we admit to “going with the wind” recently, we have had the initial direction correct. If you sold the early rally and stayed with it, you did great, but if you tried to buy the weakness, that didn't work at all. If the S&P futures close down today it will be the first 3-day losing streak of the year. Our view is while we are looking for the Pit Bull’s Thursday / Friday low, we also think it will be hard to reverse the selling momentum. The S&P futures are packed with sell stops that begin under 1606 down to 1595-1596. We are leaving it at that. As always, keep an eye on the 10-handle rule and please use stops when trading futures.

  •     It’s 8 a.m. and the ES is trading 1606.25, down 3.75 handles; crude is down 45 cents at 95.43; and the euro is down 17 pips at 1.3313.
  •     In Asia, 10 out of 10  markets quoted closed lower (Hang Seng -2.19%, Nikkei -6.35%).
  •     In Europe,11 out of 12 markets are trading  lower (DAX -1.34% , FTSE -0.78%).
  •     Today’s headline: “S&P Futures Seen Lower, Global Shares Plummet”
  •     Total volume: 2.59mil ESM and 36k SPM (25k SPM/U spreads traded)
  •     Economic calendar: Jobless claims, retail sales, import-export prices, business inventories, nat gas, 30 yr bond auction, Fed balance sheet and money supply.
  •     Fair value: S&P -5.02, NASDAQ -12.29
  •     MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-6-12-2013

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.