S&P 500 Futures; Illiquidity Sparks Volatility, #iBoxx USD High Yield Corporate Bonds

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There is a long list of obstacles facing the S&P 500 futures this week and we are not sure what tops the list; the fed raising rates, the beginning of another major problem for the stock market, or high yield corporate bonds that are tied to energy companies as oil and gas prices continue to tumble.

Is the fed over estimating the stringent of the economy as its moves to raise interest rates for the first time in almost 10 years? Home sales are declining and automobile inventories are rising. Is it possible the Federal Reserve has it wrong and that raising rates could send the economy into recession? There are a lot of moving parts to the stock market right now, and not all of them are good. At a time when most traders should be taking time off and lowering risk at year end, market volatility has increased, as well as the level of trade and volume. Yesterday’s NYSE volume was the highest in three months.

High Yield Bust


After the 8:30 CT futures open, the ESH15:CME down ticked and then rallied. Despite there being no US economic reports, It was clear to see that the markets were moving. Everything from the currencies, to crude oil, to the S&P futures were seeing sharp intraday moves up and down. The ESH16 was trading at 2006.75 when all of a sudden the futures dropped 13.5 handles in less than one minute, and then proceeded to rally over 20 handles in less than 5 minutes. Even before the quick drop and rally back the ESH was already acting erratically. Some traders were saying they had not seen the ES act like that since the beginning of the credit crisis when the S&P was ‘all over the place.’ The iShares iBoxx USD high Yield Corporate Bond exchange traded fund, which fell -2% last Friday for its largest drop since 2011, fell another 1.5% yesterday


Traders are spooked for a lot of reasons; the explosion in higher yields, the fed’s two day meeting, the Jan crude oil options expiration on Thursday, and Fridays December Quadruple witching has many traders scrambling when they should be cutting back and looking forward to the holidays.

‘Choppy’ Algorithmic Party

I am not a programmer, but it’s easy to see the big uptick in algorithmic, HFT, and program trading over the last few days. It’s almost like the jump is a precursor of something to come. Aside from the normal news headlines, the headline algos are reacting to every news headline that hits the tape related to rate hikes, the Federal Reserve, and high yield fund exposure. When I did a search of ‘2015 December Federal Reserve meeting’, hundreds of news stories came up. It has to be one of the most discussed rate hikes in the history of the Federal Reserve. Total volume in the ESH16 topped 2.6 million contracts yesterday, with about 500k of that coming from globex, and 900K from the ESZ / ESH roll, leaving the actual outright trading volume at around 1.2 million. Even with the big uptick in algorithmic trading, the markets were already acting ‘funny’, and then the fat finger drop and rally only added to spooky feeling the S&P had for most of the day.

As the markets move into the first day of the Federal Reserve’s final two day meeting of the year, the public is looking for leadership. Despite yesterday’s gains in stocks, the rally was tempered by the lower price of oil, the continued decline in junk bonds, and high expectation of the first rate hike in close to 10 years. As traders, we live and die for the ‘big moves’, but we also know the increase in volatility means higher risk. Get in, get out, don’t fall in love with your positions, but most of all, don’t forget to use stops when trading futures.

In Asia, 6 out of 11 markets closed higher (Shanghai Comp -0.29%), and in Europe 9 out of 12 markets are trading higher (DAX +2.04%). Today’s economic calendar includes the 3-Yr Note Settlement, 10-Yr Note Settlement, 30-Yr Bond Settlement, FOMC Meeting Begins, Consumer Price Index, Empire State Mfg Survey, Redbook, Housing Market Index, 4-Week Bill Auction, and Treasury International Capital.

Dec 10th and 11th ‘Flip Flop’

Our View:
If you look at the Market Delta imbalance charts there are a series of lows, and each one was less and less volume. When the PitBull asked me if that was the low, I said yes right away. Today is the first day of the Federal Reserve’s final two day meeting in 2015. Over the last few days, as the S&P sold off, traders were asking if the fed would hold off on raising rates because of the increase in volatility? We don’t think that the recent drop in the price of the S&P, or the jump in the price of the VIX is going to stop Janet Yellen and friends. There would be a huge credibility problem and the stock market would not react kindly to it.

Yesterday there was some late day back and fill that led to a rally going into the 4:00 ET cash close. The MiM was showing $400 million to sell, and the actual MOC came out $20 million to buy. A lot of times, the mutual funds will use the 14th of the month for mid month rebalancing, and that’s what we think was going on once the ESH regained its footing. Overnight the ESH16 traded all the way up to 2027.50, then pulled back to the 2022.00 area just before 7:00 am. Our view, we cannot rule out another volatile day, but we do not think it will be as volatile as yesterday. Sell the early rallies and buy weakness. The ESH may have made its low yesterday, but there are still a lot of obstacles to get past in the next 3 days.

Download all of the December expiration stats here

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


    • In Asia 6 out of 11 markets closed higher : Shanghai Comp. -0.29%, Hang Seng -0.17%, Nikkei -1.68%
    • In Europe 9 of 12 markets are trading higher : CAC +2.08%, DAX +2.04%, FTSE +1.62% at 5:15am CT
    • Fair Value: S&P -11.67 , NASDAQ -9.11, Dow -91.06
    • Total Volume: 2.65mil ESH and 25k SPH
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