Fed Minutes, S&P Futures 2073.25, and the November Options Expiration

Charts, Commentary, Our View, S&P 500, The Opening Print, Video

Macro 1

They say, from time to time, the Federal government intervenes in the markets and buys the S&P 500. This special, secretive department is call the PPT, otherwise know as the ‘Plunge Protection Team’. We saw them intervene on August 24th, we saw them intervene on the 1861 retest on September 29th, and we saw them last Sunday night when the futures sold off down to 1998.50 after the French terrorist attacks.

It’s been playing out in the S&P futures where bad news is being turned into good news. That’s the opposite of what most traders expect, but that is all part of the ‘new world trading order’, where things that used to work don’t anymore, and the new things that do work only last as long as it takes to program the algo. Yesterday the (ESZ15:CME) closed up a whopping 28.75 handles, or a gain of +1.60%. The Dow Jones Futures (YMZ15:CME) rose 222 points, or +1.50%, and the Nasdaq futures (NQZ15:CME) closed up +1.80%.

Perfect Storm

Reality hit the S&P 500 futures yesterday. The sharp rally in the S&P futures was something we call “buy the fact, sell the rumor”. Meaning, based on most of what the Federal Reserve has been saying, they intend to raise rates in the December meeting. Bank stocks took off in anticipation of the rate hike, Goldman Sachs Group closed up +1.6%, and JP Morgan closed up +2.0%. Fed futures on the CME floor, a futures product traders use to tie to central bank policy, showed a 68% chance of a rate hike during the December 15- 16 policy meeting, that is up from 38% before the October 28 Federal reserve statement according to the CME Group. In some ways it was a relief rally that the markets have finally accepted the future rate hike(s). Adding to the markets being so ‘bid’ is the November options expiration stats showing an up week. While many market timers say the markets ‘peaked’ months ago, the hard reality of this is that even after a rate hike, or even two or three interest rates hikes, rates will still be historically low. While some think it will only take a few rate hikes to kill the bull, we disagree. In fact, we think once the markets start adjusting to higher rates, it will actually clear a road block that has been in front of the index markets for over a full year. Additionally, the Dow, S&P, and Nasdaq have all made a series of higher lows. And lastly, one of the main drivers of the stock market and the S&P is the mutual funds. Over the last several months the number of mutual funds that own stock has increased from 25 to 57 to 144 to 179. Since the end of September there has been a steady flow on MOC buying, and we do not think that is going to stop anytime soon. In all respects it has been a perfect storm to the upside.

Below was a conversation I had with a former prop trader from Goldman. I had already picked up on the bid / offer size of the ESZ15 earlier in the day and noticed how there were much larger bids and offers. You can call it zero borrowing cost or the PPT, but someone had to know the S&P was going up yesterday, there were literally no pull backs, and the few that did come about were only a few handles. The overall price action was being held so tight by the buyers that anyone that sold the futures lost. I have always said I am not an analyst, and that I learned most of what I know about the markets over the 38 years on the CBOT and CME trading floors, but when you see an up move like yesterday, something big was behind it. I think the ESZ15 is on its way to new all time highs, but not right away.

( 2:54:44 PM ): (driley) RIP, RIP, RIP, been like that all day

( 2:55:58 PM ): (driley) Retail sits around looking for sell opportunities and the mutual funds are buying the ES when it goes up and down

( 2:56:43 PM ): (driley) I said yesterday the 1998.50 Sunday night low was the low that marks the year end push, you can’t fight this

( 02:56:46 ) imcyrus0: Agree Danny

( 02:56:53 ) imcyrus0: hedge fund beta keeps going down, which tells me they’re not participating in this run

( 02:57:13 ) imcyrus0: and coupled with the knowledge that they’re underperforming YTD that tells me we could get a chase for performance

( 2:58:26 PM ): (driley) big funds saying they are pulling out of the stock market, only going to make it go up more

( 2:59:58 ) imcyrus0: The last seasonal weakness will be tax-related selling into year-end — when mom and pop get the heads-up from their CPAs — But given the sideways market this year, that might be lighter than it has been recently –Good point on your part, Danny

In Asia 11 out of 11 markets closed higher (Hang Seng +1.41%), and in Europe 10 out of 12 markets are trading higher (DAX +1.61%). Today’s economic calendar includes Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index, Leading Indicators, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 2-Yr Note Announcement, 7-Yr Note Announcement, Atlanta Federal Reserve Bank President Dennis Lockhart speech in Atlanta, 10-Yr TIPS Auction, Fed Balance Sheet, Money Supply, and Federal Reserve Vice Chair Stanley Fischer speech on emerging Asia to San Francisco Fed conference.

ESZ15 Upside Smash and Grab

Our View: As I said on Monday, the 1998.50 Sunday night low was the low that starts the year end push higher. I do not think we are going back down there again this year. We again have a high level of economic reports and some earnings to get past this morning, but if all goes well, 2100 and higher is on tap. Our main concern is that the ESZ15 has rallied nearly 90 handles in literally 3 days, from Sunday night to Wednesday night. Our view is the S&P has gone 90 points without a pull back, and despite thinking the markets go higher, the S&P is need some type of sell off, and some “back and fill” type price action. Sell the early rally and buy weakness with the idea that everyone thinks the markers are going back up right now.

See all of the November expiration stats here…

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

    • In Asia 11 out of 11 markets closed higher : Shanghai Comp. +1.36%, Hang Seng +1.41%, Nikkei +1.07%.
    • In Europe 10 out of 12 markets are trading higher : CAC +.85%, DAX +1.61%, FTSE +1.34% at 6:00am CT
    • Fair Value: S&P -3.25, NASDAQ -1.48, Dow -39.56
    • Total Volume: 1.54mil ESZ and 8.9k SPZ
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