The latest thoughts from Danny Riley aka Mr Top Step
Here's his video after yesterday's close and then his thoughts for the sessions ahead
S&P 500 Futures: Pit Bulls Thursday / Friday Low Meets Turnaround Tuesday
The pre-holiday rally in the S&P 500 futures carried over into "Turnaround Tuesday" yesterday, with the ESH16:CME trading all the way up to 1892.75 on Globex. On the 8:30 CT futures open the ESH traded up to 1884.50 and then slowly sold off down to a new daily low at 1870.50. The index then rallied up to the 1891.50 level around 12:30 CT. After making the 1891.50 high, the ESH pulled back a few handles and then traded up to a new daily high at 1892.00. Most of the pull-backs after making the highs were 3 to 4 handle pull-backs. When the futures were at the low of the day I put this out in the forum:
11:13:22 TRADINGDATA2: (driley) buyers 1870.50 to 1872.50.
1900 S&P 500
The benchmark S&P 500 has now traveled 90 handles from last Thursday's low to yesterday's highs, placing the index just in reach of the 1900 level, which was a support-turned-resistance pivot point during the January sell-off. In January, the majority of the ESH16 volume traded between the 1875-1915 area, and now this zone comes into play. Given this impressive three full-session bounce, it would be simple to conclude that at least a small pull-back, perhaps to 1850, could come into play before the market determines its next move.
Volatility is decreasing, as reflected by the VIX trading 20% from last week's high, and it's clear that the price uncertainty early this year was only sustainable for so long. With the indexes down 10% in January, it seems a reasonable perspective to believe that the risk was to the upside as stocks were marked down and that the market, based on historical precedent, stood a better chance of bouncing rather than dipping to -20% on the year.
However, the relevant question becomes, how long will this rally be able to last? With the bulk of the first-of-the-year selling done, and with volume beginning to lighten, the truth is that a rally could last throughout the spring. Yesterday, the Bank of America / Merrill Lynch Hedge Fund Monitor reported that investors are holding the most cash since 2001, which according to BofA/ML, is an "unambiguous buy" signal. Furthermore, the American Association of Individual Investors sentiment poll showed the fewest amount of bulls in 20 years, even lower than March of 2009.
With sentiment seeming to be so bearish as cash has moved heavily to the sidelines, it would seem that the weak longs have been shaken out, at least in the short term. With no one else left to sell equities, and with U.S. Treasury yields near their lowest in several years, it would seem that equities could look attractive again.
We are not saying that the equity indexes are out of the woods yet; we maintain that the lows will be retested this year, and see it unlikely that last year's high will be matched. However, dead cat bounces can last for a few months and account for 10% gains off the lows, even in bear markets, which technically the S&P 500 has avoided thus far. After the 2007 high, the S&P lost over 50% to its March 2009 low, but in the process, experienced several 5-10% bounces and even greater. One recent example was this past fall while U.S. equities never fully recovered from weakness, yet still managed to close one of the best performing months in history during October's 10%+ rally. In short, we maintain that it is still a two-sided market, and that we must look at it with both a short-term as well as from a broader perspective.
In Asia 8 out of 11 markets closed lower (Nikkei -1.36%), and In Europe 12 out of 12 markets are trading higher this morning (DAX +1.78% at 6:00 am CT). Today's economic calendar includes MBA Mortgage Applications, Housing Starts, PPI-FD, Redbook, Industrial Production, Atlanta Fed Business Inflation Expectations, E-Commerce Retail Sales, 4-Week Bill Auction, FOMC Minutes, and James Bullard Speaks.
Our View: The S&P got a shot in the arm from the headlines that the Russians had gotten the Saudis to agree to a production freeze; but Iran is finally coming back online, and France is one of the first nations to take delivery and buy their oil. I am always an optimist at heart, but I do not see any way that Saudi Arabia is going to stop dumping oil on the world markets with so many wars and so much tension in the Middle East. Can the ES keep going up? Yes it can, but I do not think it will come easy, nor do I think the rally will end well. That said, 1920 and then 1950 on the upside and 1850 and 1830 as support. Sell the early rallies and buy weakness, knowing the Feb option's expiration stats are on the weak side.
