S&P 500 Futures; Crude Oil Raining on the Christmas Parade

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The holidays are supposed to be a happy time for the markets, but so far this year, they have been anything but happy. We knew going into the beginning of December there could be some headwinds, but the S&P could be at a crossroads with next week’s two day Fed meeting, and the December Quadruple Witching.

We all know that the S&P sold off hard yesterday for the second day in a row. We also know that crude oil (CLF16:NYM ) closed down -0.90%, down to $37.16, and that the markets are running scared about the December 16 Federal Reserve rate hike, and the $1.1 trillion dollars in S&P options expiring next Friday during the December Quadruple Witching. We all see that the markets are acting terribly, but it’s 8:00 pm CT and the S&P futures (ESZ15:CME) are trading at the 2050.00 area in Globex, and I have to ask; what’s so bad about that?

Look, I am not going to go over yesterday’s trade. We all know it was consumed by crude oil futures (CLF16:NYM) trading down under the $37.00 handle. Yes, that’s right, the futures fell all the way down o $36.87. I was thinking back several years ago when crude oil started rising and I told the PitBull to put on an option call spread. The first thing he asked me was “what do you know about crude oil options?” I remember telling him I didn’t know much but that I though crude oil was going to rise. It did and now it’s trading back down at 9 year lows, and still looking lower.

Not Over Till the Fat Lady Sings

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There are a few things that stick out. First, we really should not be surprised by the weakness. Historically, and even last year, there was a sharp sell off in the first two weeks of December. Personally, I didn’t expect the let down, but as I have said all along; you have to keep an eye on crude oil, and while I talked about running the CLF sell stops under $40.00s down to $37.00s, I didn’t think it would impact the ESZ futures the way it has. The selling in energies has people concerned of another big let down, and with JP Morgan’s Kolanovic talking a short term sell off, the markets are running scared. One of the characteristics of the S&P is to get everyone short into the decline, and one has to wonder, as the markets keep going down before the rate hike, what will happen after? According the Jeff Hirsch from the StockTraders Almanac:

“Now that the good Fed Chair has for all intents and purposes backed the FOMC into a corner where it really must begin to increase rates on December 16 or risk losing all credibility, it is time to revisit market action surrounding the commencement of major Fed tightening cycles.

We have updated our long-term look at how the market has behaved from 1 year before a new major tightening cycle to 1 year after. In addition, we have added a zoomed in look at trading action on the 30 trading days prior and the 60 trading days after.

We currently appear to be tracking the historical pattern of positive market action leading up to the first rate increase, which would indicate a mild selloff after. However, as we have been thinking recently, this being the most debated and anticipated Fed move of all time, the removal of uncertainty may send stocks higher into year end this time around.”

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In the end no one knows for sure what the S&P is going to do in the final days of 2015. If history repeats, the weakness we see today could be a big rally tomorrow. As always traders, get in and get out ,and don’t fall in love with your positions.

In Asia, 8 out of 11 markets closed lower (Shanghai Comp -0.49%), and in Europe 10 out of 12 markets are trading lower (DAX -0.14%). Today’s economic calendar includes the Weekly Bill Settlement, 52-Week Bill Settlement, Jobless Claims, Import and Export Prices, Bloomberg Consumer Comfort Index, Quarterly Services Survey, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 5-Yr TIPS Announcement, 30-Yr Bond Auction, Treasury Budget, Fed Balance Sheet, and Money Supply.

WELCOME TO THE DEC / MARCH ROLL-OVER

Our View: The ESZ is going to bounce either today or tomorrow. If you look at the December expiration study the stats are good all week with the exception of Thursdays Expiration Stats.

Get all of the December expiration stats here

Its not hard to see whats going on, the question is, will the S&P keep going down? My gut tells me the sell off is not over, but that doesn’t mean the ESZ won’t bounce. Right now the public is running scared; once everyone rolls lower and the the big investment firms get short the ES as a hedge, it will start going back up. Our view is we are looking for the PitBull’s Thursday / Friday low the week before the December expiration. The question is, if the ESZ does make a low, will it hold into next week’s fed meeting and expiration?

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

    • In Asia 8 out of 11 markets closed lower : Shanghai Comp. -0.49%, Hang Seng -0.45%, Nikkei -1.32%
    • In Europe 10 of 12 markets are trading lower : CAC -0.10%, DAX -0.14%, FTSE -0.47% at 6:00am CT
    • Fair Value: S&P -9.94, NASDAQ -10.18, Dow -95.06
    • Total Volume: 2.69mil ESZ and 14.7k SPZ
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