S&P 500 Futures Smash and Grab: Markets Take First Rate Hike in Stride

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The Federal Reserve raised rates for the first time since 2006. The ¼ point rate hike was expected, and received, by the S&P 500 futures (ESH16:CME) exactly like we thought it would, initially selling off and then rallying. Is the rate hike a ‘one and done’, deal or are there more hikes to come? As a trader there has been an overload of headline news about the rate hike, and now that it’s happened, we think it’s time to move on for now and start thinking about this Fridays Quadruple Witching, the holidays, and the Santa Clause rally.

As for yesterday’s S&P futures trade, the (ESH16:CME) gapped higher on the 8:30 CT open, proceeded to rally up to the 2052.25, level then sold off down to 2037.50 before the 2:00 Fed headlines hit the tape. Earlier in the day several traders mentioned the 2040.00 area as support, but after the 2037.50 low, the ESH ‘firmed up’ and then short covered just before the announcement. One of the things I did on the trading floor was provide what was called ‘color’. Years ago the PitBull would call me and literally yell at me for not calling him every time the S&P moved two or three handles (points). The mission of the trading desk and the clerks was to provide execution while avoiding giving out trading advice, but that’s not what the big banks and hedge fund traders wanted to hear; they wanted what I today call ‘flow’. Flow could mean many things, from a high or low made on little volume, to the latest headline on Apple or the latest buy or sell program in the ES futures.

Trading is not what it used to be, the algorithmic programs are trained to fight the short term trader. Working the index arbitrage business for UBS in the S&P’s, and having large order flow, gave me a considerable edge over most of the other S&P desk’s on the CME floor. When you had both side’s of the trade, business flocked to you. One could literally read the order flow which is where the term ‘flow’ came from. Yesterday I used part of that very same trading flow that I provided on the trading floor to multi-billion dollar funds to our trading forum and Twitter in real time. Prior to the +0.25% rate hike I talked about MrTopStep’s trading rule about ‘fading’ the initial move after a Fed decision, and after the drop and subsequent uptick, I started rattling the upside cage. I knew that the initial reaction was to sell the news, and I said after that there would be an upside rip. Not long after the initial dip the ESH16 went into an upside buy program that pushed the futures all the way up to 2068.75. I am not here to pat myself on the back, I knew that once the ESH16 started moving back up after the drop that there was a large potential to start running the upside buy stops, and the algorithmic trading programs obliged my idea and the futures took off to the upside. I would ask that you go back and do a time and sales of just of few of these messages and where the S&P went after they were sent out. The messages were sent out in ET.

ICEchat ( 2:03:30 PM ): (driley) 02:02:21 TRADINGDATA2: (driley) going to rip

02:05:56 TRADINGDATA2: (driley) home builders and banks popping

02:07:00 TRADINGDATA2: (driley) Algos searching for upside buystops

02:16:10 TRADINGDATA2: (driley) buyers at the vwap

02:29:50 TRADINGDATA2: (driley) buyers showing up under the vwap again

ICEchat ( 2:35:46 PM ): (driley) I think the ES is going to rip again

02:36:41 TRADINGDATA2: (driley) next 10 handles are up

ICEchat ( 2:36:50 PM ): (driley) next 10 handles are up

02:40:47 TRADINGDATA2: (driley) sellers  / back to the vwap

02:42:32 TRADINGDATA2: (driley) buys showing on and above the vwap

ICEchat ( 2:45:09 PM ): (driley) I still think a rip is coming

ICEchat ( 2:49:30 PM ): (driley) can u feel the rip coming?     

ICEchat ( 2:56:05 PM ): (driley) stops and buy programs

ICEchat ( 2:57:04 PM ): (driley) Learn to take your gut feeling and apply it to your charts and remember, everyone is looking at the same thing

I think you get the idea. Please, go back and pull a time and sales. Again this is not about patting myself on the back for a good call as much as it is trying to help people get out of the way of an upside steamroller. One of the things the closure of the futures pits has done is remove the human side / touch of trading. The lost art of relaying information over the phone to a customer in the S&P futures is gone, but the art of reading the futures tape is not. The computers may help run the S&P up and down but it’s up to us as traders to follow the patterns and learn to how the computers think. As I have always said; think like an algo!

In Asia, 11 out of 11 markets closed higher (Shanghai Comp 1+.81%), and in Europe 11 out of 12 markets are trading higher (DAX +3.31%). Today’s economic calendar includes Jobless Claims, Philadelphia Fed Business Outlook Survey,Current Account, Leading Indicators, EIA Natural Gas Report, and a 5 Yr-TIPs Auction.

On to the next

Our View: As traders there is always some obstacle we have to get past, some event, some headline, but now that we don’t have to see Janet Yellen’s face until 2016, maybe we can put the rate hikes and all the talk behind us for now. Sometimes there is a tendency to get an overload of one market subject and at least for me it’s been the Fed all year. Next year will be more Fed talk combined with elections, but for now and through the end of the year perhaps, we can finally have that seasonal slow down and a thin-to-win grind higher for the Santa Clause rally. Our view is that after a big up day like yesterday, and with a 80 handle rally the last three days, the ESH should see some type of sideways to downward price action. We lean to selling the early rallies and buying weakness.

MrTopStep Pre-Fed Update

Download the S&P Cash Study for the December Quadruple Witching here


    • In Asia 11 out of 11 markets closed higher : Shanghai Comp. +1.81%, Hang Seng +-.79%, Nikkei +1.59%
    • In Europe 11 of 12 markets are trading higher : CAC +2.48%, DAX +3.31%, FTSE +1.57% at 5:15am CT
    • Fair Value: S&P -8.26 , NASDAQ -7.28, Dow -84.89
    • Total Volume: 2.0mil ESH and 17.4k SPH
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