S&P 500 Futures; Central Bank Supercharged

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chart 06-07-2016

Central bankers have become the new rock stars of the world. In the United States, Japan, European Union, and elsewhere, the world tunes in to each speech and dissects each line as these bankers speak. The Central Banks have always played a role in this market, but they now seem to be more proactive than reactive, and they tend to attempt more to shape economic policy rather than just assist it. The BoJ instituted a negative interest rate then surprised analyst by refraining from additional stimulus. Meanwhile, the Fed remains Hell bent on raising rates as soon as they logistically can, and possibly the most double talk comes from the ECB who seems to be in a long term low interest rate/high stimulus environment for years to come.

What Is Your Central Bank Up To?

The term ‘don’t fight the fed’ has a new meaning lately. Despite the constant threat of rising interest rates, the US Federal Reserve remains data dependent, and many interest rate increase forecasters are now starting to say there may not be any hikes until after the election. Friday’s initial reaction to the disappointing 38k NFP print was to trade lower along with the US dollar as treasuries rallied. However, the dollar and treasuries continued their trends, and the S&P 500 reversed and began to trade higher and push back to 2100. This was because at some point, everyone knew that the chances of a June hike were virtually erased, and July’s chances, according to the Fed Fund Rate Futures, were dwindling. Buying the dip looked to be the most consistent response.

This strength from Friday’s regular session carried over yesterday as the S&P futures made a new June contract high trading up to 2109. After Yellen’s mostly hawkish comments, the S&P dipped again, and buyers were there to push it higher up to 2112.00 before closing at the futures highest levels since last August, on a continuous chart basis. Overnight, the worldwide equity markets continued to see a risk off trade, and the ESM16 pushed even higher trading up to 2116.25, just 1% from new all time highs.

Going into today’s “turnaround Tuesday” trade, the S&P’s appear to look for a continuation of yesterday’s price action, with no immediate turnaround in site. The calendar today is light and globex volume is 133K at 6:00 am cst. The last time the futures were at 2116.00 was on July 21st, almost a year ago. After fighting the two 10% drops in the last year the S&P finds itself back in the same boat, and after fighting 2100 for the last couple months, it has finally broke above and is building a floor. People ask when will the S&P reach its high? The only answer I have is when all these bears start throwing in the towel is mass waves and sentiment finally turns bullish again. Sentiment, on an overall basis, has been close to turning, but as the commitment of traders report shows a near record amount of shorts amongst small speculators, I just can’t help but thinking there are more buy stops to the upside.

In Asia, 11 out of 11 markets closed higher (Shanghai +0.07%), and In Europe, 11 out of 11 markets are trading higher this morning (DAX +1.68%). Today’s economic calendar includes Productivity and Costs, Gallup US ECI, Redbook, 4-Week Bill Auction, 3-Yr Note Auction, Consumer Credit, and Treasury STRIPS.

Our View: The S&P has rallied about 3% over the last two weeks and is now within 1.2% of its 2134 all time contract high (ATH). The futures are now at a level that the S&P has failed at every time it has gotten close to over the last year and a half. Sentiment is starting to show excessive bullishness, and if you look at the S&P cash study (download the S&P cash study here), it’s hard to imagine what can stop the current push higher. As the public and the mutual funds put money back to work we think there are more gains ahead. I said a few weeks ago that the pull backs will continue to be limited in scope which should set up higher prices over the summer. Our view, total volume was only 1.27 mil., the lower volumes will continue to favor the upside. You can sell the rallies and buy weakness or just go with the trend and buy the S&P when it pulls back / sells off. 2130 is on TAP.

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

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    • In Asia 11 out of 11 markets closed higher: Shanghai Comp +0.07%, Hang Seng +1.42%, Nikkei +0.58%
    • In Europe 11 out of 11 markets are trading higher: CAC +1.21%, DAX +1.67%, FTSE +0.48% at 6:30am CT
    • Fair Value: S&P -1.43, NASDAQ -1.21, Dow -12.90
    • Total Volume: 1.27mil ESM and 4.3k SPM traded
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