Stock Market Imbalances: Follow the Money

Our View, Stocks, The Opening Print, Trading Rules

ES 12-14 (15 Min)  9_25_2014

Investors and traders never know for sure what the stock market will do next, but if you followed the price action in September it was clear that the mutual and investment funds have been selling. Part of the selling can be tied to global risk, but the real reason is called profit-taking.

Yesterday the S&P 500 (^GSPC:SNP) did exactly what it has done for most of September’s 19 trading days, selling off after a big index arbitrage sell program. We pointed out how these sell programs would show up and it didn’t matter if the S&P was up or down on the 8:30 open there was a sell program that had preceded it. Over the 29 years of running an S&P execution desk we have seen hundreds of patterns, but after seeing the S&P futures trading above and below the “big figure” S&P 2000 so many times and failing to hold above, we suspected the sell programs were tied to the end of the 3rd quarter rebalance. What we didn’t know was how pervasive these sell programs would be.

Buy and Sell Imbalances: Follow the Money

Market-on-close orders have always been part of the day’s trade. Sometimes they are big, sometimes small, but they are always there. Some people say they do not pay attention to them, but we do, and we can clearly show you how these imbalances move the S&P up and down. On Tuesday’s close the e-mini S&P 500 futures contract (ESZ14:CME) was down sharply (-14 handles), but a 2:45 cash imbalance of $1.1bil to buy seemed out of line for what was going on. The futures ticked up into the closing bell but then sold off again. This had traders thinking the markets were still no good.

On Wednesday’s open the futures were higher and then in came the usual early sell program and the futures could not have looked worse. After selling off down to 1969.50 Wednesday morning, the futures “bottomed” and rallied a full 22.5 handles up to 1992.00. On Wednesday’s close, with the futures up 18.75 handles, in came a closing imbalance to sell $830 mil MOC. Sure enough, yesterday the ESZ14 closed down 29.4 handles. To say that these imbalances do not affect the markets would be like saying program trading does not affect the S&P; it does.

Conclusion: Use all the information the market offers you when trading. Overlooking buy and sell imbalances and new money flows in and out of the markets would be a mistake. You may not trade off them, but make sure you’re aware of them.

The Asian markets closed modestly lower and 9 of 12 European markets are trading higher. Today’s economic calendar includes the GDP numbers, corporate profits, consumer sentiment and earnings from BlackBerry (NASDAQ: BBRY) and Finish Line (NASDAQ: FINL).

S&P Down 4 Out Of the Last 5 Days

Our view: I was not sure what type of day yesterday would be but I knew the $830 million for sale on Wednesday’s close was not a good sign, nor was yesterday’s opening sell program. The threats by ISIS to attack U.S. subways didn’t help either. Once the ESZ14 started lower it was one sell program after another as the algos chased the S&P lower. In all honesty I do not remember a time where there were so many sell programs.

That said, it seems like everyone is nice and bearish now. I believe I have been fairly consistent about the direction and have stuck with the idea that all the selling we are seeing is tied to next Tuesday’s Q3 rebalance. My question is, with all the selling leading up to the rebalance, will there be anything left to sell on the last day of the quarter?

Our view is that there is probably more downside coming our way, but I can’t rule out some type of Friday bounce. With everyone short and the weekend upon us, it should be a much slower day. And like yesterday we must also go with the MrTopStep trading rule that says the S&P usually will trade sideways to higher after a big down day.

Sell Rosh Hashanah / Buy Yom Kippur


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

  • In Asia of 8 out of 11 markets closed lower: Shanghai Comp. +0.11%, Hang Seng -0.38%, Nikkei -0.88%
  • In Europe 9 of 12 markets are trading higher: DAX +0.02, FTSE +0.03%, MICEX -0.58%
  • Fair value: S&P -7.65, Nasdaq -9.17, Dow -88.15
  • Total volume: 2.3mil ESZ and 7.6k SPZ traded
  • Economic schedule: GDP, corporate profits, consumer sentiment and earnings from BlackBerry (NASDAQ: BBRY) and Finish Line (NASDAQ: FINL).
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