The S&P 500 and December expiration

Our View

ES 12-13 (Daily)  12_13_2012 - 12_13_2013The S&P 500 (^GSPC:SNP) fell for the third day in a row and the Dow closed down over 100 points for the second day in a row. The wave of selling that started in the last week of November is continuing right into the December expiration.

MrTopStep has been following the Pit Bull’s rule about looking for a low in the S&P the Thursday or Friday the week before the expiration for many years, and for a few hours yesterday, it looked like the low was in, but with an MOC showing sell $630mil and $1.7bil in SPX for sale on the cash close the S&P was dead meat.

Complacency at its best

One important indicator we should be paying attention to at year end is sentiment. With the S&P up over 25% and all the selling going on it has not shaken the bulls. The American Association of Individual Investors survey shows the bearishness at 25%, down 2.5 points from last week, and bullishness at 41.3% , down 1.4 points from last week, which is on the bullish side but not an extreme by any means.

Bullish sentiment maxed out at 75% in the tech bubble crash and in 1987 got down to 6%. While the 41.3% bullishness is high, what it shows is the public doesn’t seemed to be too concerned about the taper or all the selling we are seeing.

The other well-known company that tracks sentiment is Investors Intelligence. Their survey shows an even higher level of bullishness. According to Investors Intelligence’s latest report, bullish advisors rose to another new high in 2013 to 58.2%, taking out the old high at 57.3% back in April of 2011. What this means to us is complacency is at an all-time high and traders are too afraid to commit to being bearish. Investors Intelligence has the bears unchanged at 14.3%, the lowest it’s been since March 20, 1987, when it got down to 13.6%.

Follow the $$$$

If following the money was the best way to follow the S&P at the beginning of 2013, following the money at the end of the year is proving just as important. Taper or no taper, the S&P is going to correct in 2014. We can talk about all the ups and downs and we can talk about how Facebook rallied because of the company being added to the S&P next week and we could also talk about the weakness in Ciena and we could even talk about the world’s largest IPO, Hilton.

But you don’t come here for that. Some of the things you read elsewhere come from people who have nothing to do with the S&P. We have been in the S&P since 1985 and been part of every major stock market event for the last 28 years.

In Asia 7 of 11 markets closed higher and in Europe 8 out of 12 markets are trading higher. Today’s economic calendar includes one release, the Producers Price Index. The October number fell -0.2% after dropping -1% the month before. This number used to be a market mover, but it isn’t anymore. As always, the trading week started out slow and picked up all week. Hopefully today will be busy…

Our View

All the selling is making the S&P a sell rallies market. Over the last 12 trading days the MOCs we track have sold $11 billion in stock. It’s real money and it’s real selling. We have been eternal bulls in 2013 and have avoided many a “false start” by sticking with buying weakness, but it’s really hard to overlook the big-time selling and the overall weak price action. That said, we have learned all too many times that when we overlook the Pit Bull’s Thursday/Friday low we end up regretting it.

Our view is to buy weakness today. We think the S&P is going back up. We don’t doubt traders will sell the gap up on the open, but we want to be a buyer when they come down. According to the Ned Davis expiration study, the Friday before the December expiration has been up 19 / down 10 of the last 29 occasions. There is a boatload of buy stops above 1788 and that’s where we think the ESZ is headed. We will be switching to the March contract on Monday.

As always, don’t forget the 10-handle rule and please use stops…

  • In Asia, 7 of 11 markets closed higher: Shanghai Comp. -0.31%, Hang Seng +0.12%, Nikkei +0.40%
  • In Europe 8 of 12 markets are trading higher: DAX +0.01%, FTSE +0.07%
  • Morning headline: S&P Futures Seen Higher After Three-Day Decline”
  • Total volume: 883k ESH and 4K SPH traded
  • Economic calendar: Producer Price Index

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One thought on “The S&P 500 and December expiration

  • As usual, thanks for your insights!

    “Taper or no taper, the S&P is going to correct in 2014”

    For me, I’ll keep my crystal ball where it belongs – in a taped box stashed in the back of the closet.

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