S&P 500 Futures; Fear Instead of Cheer – Crude Oil Down to $36.12

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The holidays are supposed to be a time of year when people take vacations and cut back from the day to day ins and out of trading, but that’s not the way it is this year. Going into the final 14 trading days of 2015 volatility (VIX) has jumped up 30% this week, while the S&P 500 futures (ESZ15:CME) are falling down 1.75%, and oil futures (CLF16:NYM) are crashing down 8%. Crude oil is down more than 66% from it’s highs made in 2014, is down over 1/3rd of its value in 2015, and is now trading near multi year lows for the first time since 2009. On yesterday’s close the CME Group’s CLF16 settled at $36.76, down -1.56%.

Despite the anticipation of the Fed, and other factors, there is some seasonality in play as the Volatility 2Index (VIX) tends to rise in the first half of December before falling off a considerable amount into Christmas, and then again rises into the end of December. Meanwhile crude oil futures have a tendency to fall in the early part of December and find a mid month low before bouncing into years end as demand picks up for the holiday season. Also worth noting, the S&P 500 typically experiences about 3.5% December drawdown, and has now matched that, while the norm has been for the low to come in on the 10th trading day of the month, which will be Monday the 14th, however the last two years the December low 3was placed on the 16th which coincides with next week’s FOMC meeting. Lastly, it’s worth at least remembering that after last years early December weakness, the futures rallied about 125 handles between the 16th and Christmas.

S&P Futures Down 3 in a Row?

We could do a play by play of the day’s trade, but in a nutshell, the ESZ15 dropped, rallied sharply, and then reversed lower as crude oil (CLF16:NYM) broke the $37.00 level and continued down to new lows at $36.38 a barrel.

The public is cheering the lower price of oil and gasoline under $2.00 a gallon, but energy companies in the S&P continue to suffer. The S&P should be getting ready to start its year end rally, but crude oil is ‘capping’ every rally. Despite the negative price action, trades have been digging in on the daily swings. A trader I spoke to from the CME Group’s S&P 500 pit said “Between the roll over, and crude oil dropping, its really thinned out. Most of the traders around me in the pit think we drop further.” Over the last few days crude oil futures have been doing record volume, and in addition to the Fed raising rates on the 16th, and the $1.1Trillion in S&P 500 options expiring on the Dec. 18th, someone forget to include the CL_F options expiration next week, as it could end up being one of the most volatile weeks of the year, and what we are witnessing are many big firms cutting back positions in anticipation of this.

Fear Instead of Cheer

Right now there is a lot of fear out there, and it’s justified, based on the current makeup of the markets. Part of this fear is due to the United States inability to garner a plan to wipe out ISIS. All the selling going on in stocks is in front of the Federal Reserve’s first rate hike in nearly 10 years and the December Quadruple Witching, that has $1.1 trillion in S&P options expiring next Friday. Clearly fear has won over cheer.

If we have learned anything about the S&P, and the overall structure of the markets, and as we head into the final 14 trading days of the year, we should never forget how resilient the S&P is and what happens after a ‘sharp’ sell off. While the S&P may have more downside, Santa will come, he’s just been sidetracked by the US Federal Reserve.

In Asia, 9 out of 11 markets closed lower (Shanghai Comp -0.61%), and in Europe 11 out of 12 markets are trading lower (DAX -1.73%). Today’s economic calendar includes the PPI-FD, Retail Sales, Business Inventories, Consumer Sentiment, and Baker-Hughes Rig Count.

Our View: The price of oil continues to drop bringing down the S&P. Don’t worry traders, Santa is coming, but the markets have to scare everyone to death before they go back up. Instead of Ho Ho Ho, it’s been HOAX, HOAX HOAX! The bears have the ball in their court, and even if we get the PitBull’s Thursday / Friday low, I’m not sure that means the ES is going to hold up through next week. The same people that were calling for a pop to $48.00s in CL are now saying it’s going to $30.00. The way I see it is, CL is getting close to a low and a $4.00 to $5.00 bounce. I don’t think the decline is over, but I can’t be a seller at $35 or $36 oil. Our view: still looking for the PitBulls low. Like I said, not sure it will hold into the middle of next week, but there has to be some type of pop in here. Santa is coming, just not till after the Dec. Quad witch.

Download all of the December expiration stats here

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


    • In Asia 9 out of 11 markets closed lower : Shanghai Comp. -0.61%, Hang Seng -1.11%, Nikkei +0.97%
    • In Europe 11 of 12 markets are trading lower : CAC -1.31%, DAX -1.73%, FTSE -1.11% at 6:00am CT
    • Fair Value: S&P -9.20 , NASDAQ -9.03, Dow -88.41
    • Total Volume: 1.8mil ESZ and 16.7k SPZ
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