S&P 500 Futures; China Rally, US Non-Farm Payroll and B-52 Bombers

Commentary, News, Our View, The Opening Print

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When the Shanghai Composite started moving higher Thursday night it took the S&P futures (ESH16:CME) for the ride higher. The futures rallied from a low of 1928.50 all the way up to 1964.75, and by 2:45 CT were trading under the early low down to a new daily low at 1910.00. It was another wild day of ups and downs that has not been seen since 1930.

Over a year ago I took fellow trader Tony LaPorta ( http://tonylaporta.com/ ) on the CME floor to meet and speak with CNBC’s Rick Santelli, and while the discussion was about trading it didn’t include anything about the S&P 500, it revolved around one topic; the currency wars. As an index futures trader I look at all the markets from bonds, to gold, to crude oil, to the currencies. Years ago, all a trader had to do was pick a commodity or a financial futures contract and just start trading away, but in today’s world everything is interconnected and intertwined in ways that most traders cannot understand or keep up with. I love trading, and have been in the industry for nearly 40 years, and while some traders may disagree with what we saw last week I have never seen the Dow down 5% in the first five trading days of the year. In addition to the worst start for the Dow ever, the Euro had its worst weekly performance since early December of last year, and the dollar had its worst weekly performance against the yen since August 2013. Early Friday morning the dollar was trading higher as the Shanghai Composite stabilized and rallied again after the jobs report showed a higher than expected nonfarm payroll number of 292,000 jobs created, but like the S&P, as the session wore on so did the dollar. While many traders put credence into the jobs report the other side of the coin was there was no wage growth.

With the S&P 500 futures off 6% in the first five trading days of the year, or their worst weekly decline since 2011, investors have been feeling the discomfort. After struggling to hold the rally the Dow Jones industrial average sank 167 points, or -1% to 16,346. The Dow’s more than 1000 point loss last week was the worst opening five days to a year ever, and the NASDAQ closed down 1% pushing its losing streak to seven days, its longest since 2011.

So where is the silver lining? it may be hard to find at least in the beginning of 2016. Three weeks after the Federal Reserve’s decision to raise interest rates for the first time since 2006, their decision and the subsequent downturn in the market has many questioning the fed’s timing.

When you combine the uncertainty of the Chinese economy, the continued weakness in Europe, rising rates in the United States, the S&P down 7.3% since the Fed raised rates on December 16, and despite the jump in nonfarm payroll and the uncertainty following the December rate hike, many traders we speak to are now questioning the Fed’s ability to continue to raise rates. Some are even questioning if the Fed could be forced to cut rates before raising them again.

Twice last week China’s benchmark index, the Shanghai composite, was halted for the day after a drop of 7%. These trading halts came as China continued to fix the yuan which is pegged to the US dollar. This goes back to what I was talking about in the beginning of today’s opening print, that it’s not just interest rates that are overshadowing, there are full-blown currency wars going on. To a stock trader that may not seem so important, but currency wars can create financial disruptions that are even greater than the stock market. According to Bank of America’s Michael Harnett, tightening of financial conditions from the fed often cause market events.

FED cycles

Right now there is still this risk off mentality which we do not think will change anytime soon unless the global economy improves. Fed policy makers have been emphasizing progress in the economy which has been their guide to raising interest rates but, with the Chicago Board of options volatility index up 8.1% on Friday after dropping 10% earlier in the day, the turbulence is starting to scare people. With the VIX sitting at a three-month high, and up 48% this month, we are seeing largest jump since the 135% jump last August. on top of all this Alcoa kicks off the earnings season today and other big names like J.P. Morgan Chase, Intel Corp, Wells Fargo, Citigroup, and Blackrock are scheduled to deliver results this week.

It’s going to be another busy week. Despite the overall lower economic schedule, China, the January options expiration and the beginning of the earnings season, there should be enough to keep traders glued to their seats. We’ve always said that we’re not here to fight City Hall and if the markets are going up or down we want to go for the ride. As futures traders we have one job, get in, get out, and to not fall in love with our positions.

In Asia, 11 out of 11 markets closed lower (Shanghai Comp -5.33%), and in Europe 7 out of 12 markets are trading lower (DAX +0.62%). This week has a lower number of economic releases scheduled, while there are only 15 economic reports there is a slough of fed speak with 6 different Federal Reserve bank presidents speaking and 8 T-bill or T–bond auctions or announcements.

B-52 South Korean Fly Over

Our View: The flyover of the B-52 bomber over South Korea is only going to heighten tension in the Korean Peninsula. While President Obama continues to do this balancing act in the Middle East, the North Korean nuclear bomb test has added new volatility to an already very volatile marketplace. During last night’s Globex session the ESH16:CME sold off down to 1993.50, back and filled above 1900.00, rallied up to 1928.50, sold back off down to 1914.25 earlier this morning, and has popped back up to 1925.75 around 7:15am CT. I could be wrong but it feels like the ESH has made a short term bottom. Our view is that there are lot less economic reports this week and an uptick in fed speak. With this being the January options expiration week the S&P could start to go back up. The Monday of the January expiration week has been up 13 / down 12 of the last 25 occasions, and tomorrow is statistically the most favorable day of the week, up 21 / down 11 of the last 33 occasions. This does not mean that there can not or will not be a sell off retest, but the bus has gotten too full, and it’s time to run some upside buy stops. What better week to do that then the January expiration week. We lean to selling the early rallies and buying weakness.

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 lower : Shanghai Comp -5.33%, Hang Seng -2.76%, Nikkei -0.39%
    • In Europe 7 of 12 markets are trading lower : CAC +0.53%, DAX +0.62%, FTSE +0.18% at 5:00am CT
    • Fair Value: S&P -7.86, NASDAQ -9.16 Dow -94.10
    • Total Volume: 2.68 mil ESH and 7k SPH
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