Embrace the pre-Fed chop when trading the S&P futures

E-mini S&P 500, Our View, S&P 500

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The S&P futures (ESZ14:CME) closed down for the 3rd time in 8 sessions. The energy sector held stocks down for most of the day, but it was not a very broad-based selloff.  After some miserable price action and $90mil to buy on the cash close the ESZ14 managed to crawl its way back to down just 2%. The Dow (^DJI:DJI) closed up +0.10% and the Nasdaq Composite (NQZ14:CME) gained less than +0.1%.

S&P chop shop

I told the Pit Bull Sunday night when the ES was up 1.5 handles that I thought the S&P would sell off, and it did. Most of yesterday’s weakness came from the energy sector. For several weeks now crude has continued lower, but Goldman’s downgrade of several energy sector stocks to “neutral” or “sell” only added to the weakness. The S&P 500 energy sector index, which has fallen over 15% in the last 3 months, fell another 2% yesterday. While the energy markets weighed down on the S&P, it wasn’t enough to keep it down late in the day. It was also a much lighter day in terms of volume also.

Earnings deluge

The Wall Street ritual of understating the S&P 500 (^GSPC:SNP) earnings season will be put to the test this week. With 213 companies reporting so far and 158 companies in the S&P reporting this week, it is an earnings deluge. So far there have been a lot of companies reporting better than “expected,” and we suspect that trend will continue this week. What we don’t know for sure is if traders will sell the news. Despite all the big ups and big downs, investors seem to be a little more optimistic this week. After the S&P rallied 4.1% last week there are still a lot of traders that think the S&P is going to go back down. We do not think that way. We think that the earnings will catapult the S&P back to the 1990-2000 level.

There are a lot of things that traders can hang their hats on, but betting against the S&P in November and December is not one we feel comfortable with. Over my 37 years on the trading floors of the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) I have learned not to fight bullish seasonal patterns, especially the best 6 months for stocks, November to April.

In Asia 6 of 10 markets traded higher and in  Europe 11 of 12 markets are trading higher this morning. Today’s economic calendar includes first day of the FOMC meeting, durable goods, Redbook, S&P Case-Shiller HPI, consumer confidence, Richmond Fed Manufacturing Index, 2-year note auction and earnings from Aetna (NYSE: AET), Facebook (NASDAQ: FB), Pfizer (NYSE: PFE), and McKesson (NYSE: MCK), among a large number of multi-billion-dollar earners.

Our view: Today is the first day of the Federal Reserve’s two-day meeting. There is a slew of economic and earnings reports to get past this morning. If the public thinks the S&P is going down into the Fed meeting … well, it may go down, but I don’t believe it will stay down. The end of October and the first trading days of November will push the S&P back up. I am sticking with my S&P futures 2100 high and 2085 settle at year end.

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 6 of 11 markets closed higher: Shanghai Comp +2.07%, Hang Seng +1.36%, Nikkei -0.38%
  • In Europe 11 of 12 markets are trading higher: DAX +1.51%%, FTSE +0.46%,  MICEX +1.67%
  • Fair value: S&P -6.36, Nasdaq -9.25, Dow -75.75
  • Total volume: 1.44Mil ESZ and  4.3K SPZ traded
  • Economic schedule: Two-day FOMC meeting opens, durable goods, Redbook, S&P Case-Shiller HPI, consumer confidence, Richmond Fed Manufacturing Index, 2-year note auction and earnings from Aetna (NYSE: AET), Facebook (NASDAQ: FB), Pfizer (NYSE: PFE), and McKesson (NYSE: MCK), plus many more.
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